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Livestock Disease Indemnity Design When Moral Hazard Is Followed by Adverse Selection

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  • Benjamin M. Gramig
  • Richard D. Horan
  • Christopher A. Wolf

Abstract

Averting or limiting the outbreak of infectious disease in domestic livestock herds is an economic and potential human health issue that involves the government and individual livestock producers. Producers have private information about preventive biosecurity measures they adopt on their farms prior to outbreak (ex ante moral hazard), and following outbreak they possess private information about whether or not their herd is infected (ex post adverse selection). We investigate how indemnity payments can be designed to provide incentives to producers to invest in biosecurity and report infection to the government in the presence of asymmetric information. We compare the relative magnitude of the first- and second-best levels of biosecurity investment and indemnity payments to demonstrate the tradeoff between risk sharing and efficiency, and we discuss the implications for status quo U.S. policy. Copyright 2008, Oxford University Press.

Suggested Citation

  • Benjamin M. Gramig & Richard D. Horan & Christopher A. Wolf, 2008. "Livestock Disease Indemnity Design When Moral Hazard Is Followed by Adverse Selection," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 91(3), pages 627-641.
    • Handle: RePEc:oup:ajagec:v:91:y:2008:i:3:p:627-641
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    File URL: http://hdl.handle.net/10.1111/j.1467-8276.2009.01256.x
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    Cited by:

    1. MacLachlan, Matthew & Ramos, Sean & Hungerford, Ashley & Edwards, Seanicaa, 2018. "Federal Natural Disaster Assistance Programs for Livestock Producers, 2008-16," Economic Information Bulletin 276251, United States Department of Agriculture, Economic Research Service.
    2. Rob Fraser, 2018. "Compensation Payments and Animal Disease: Incentivising Farmers Both to Undertake Costly On-farm Biosecurity and to Comply with Disease Reporting Requirements," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 70(3), pages 617-629, July.
    3. Chitchumnong, Piyayut & Horan, Richard D., 2015. "Multiple Choices, Strategic Interactions, and Market Effects in Livestock Disease Risk Management," 2015 AAEA & WAEA Joint Annual Meeting, July 26-28, San Francisco, California 205778, Agricultural and Applied Economics Association.
    4. Kobayashi, Mimako & Melkonyan, Tigran A., 2011. "Strategic Incentives in Biosecurity Actions: Theoretical and Empirical Analyses," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 36(2), pages 1-21, July.
    5. Jaap Sok & Egil A J Fischer, 2020. "Farmers' heterogeneous motives, voluntary vaccination and disease spread: an agent-based model," European Review of Agricultural Economics, Oxford University Press and the European Agricultural and Applied Economics Publications Foundation, vol. 47(3), pages 1201-1222.
    6. Tong Wang & David A. Hennessy, 2015. "Strategic Interactions Among Private and Public Efforts When Preventing and Stamping Out a Highly Infectious Animal Disease," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 97(2), pages 435-451.
    7. Emma Hubert & Thibaut Mastrolia & Dylan Possamai & Xavier Warin, 2020. "Incentives, lockdown, and testing: from Thucydides's analysis to the COVID-19 pandemic," Papers 2009.00484, arXiv.org, revised Apr 2022.
    8. Xudong Rao & Yuehua Zhang, 2020. "Livestock insurance, moral hazard, and farmers’ decisions: a field experiment among hog farms in China," The Geneva Papers on Risk and Insurance - Issues and Practice, Palgrave Macmillan;The Geneva Association, vol. 45(1), pages 134-156, January.
    9. Rault, Arnaud & Krebs, Stéphane, 2011. "Catastrophic risk and risk management, what do we know about livestock epidemics? State of the art and prospects," Working Papers 208108, Institut National de la recherche Agronomique (INRA), Departement Sciences Sociales, Agriculture et Alimentation, Espace et Environnement (SAE2).
    10. Benjamin M. Gramig & Richard D. Horan, 2011. "Jointly determined livestock disease dynamics and decentralised economic behaviour," Australian Journal of Agricultural and Resource Economics, Australian Agricultural and Resource Economics Society, vol. 55(3), pages 393-410, July.
    11. Heikkilä, Jaakko & Niemi, Jarkko K. & Heinola, Katriina & Liski, Eero & Myyrä, Sami, 2016. "Anything left for animal disease insurance? A choice experiment approach," Review of Agricultural, Food and Environmental Studies, Institut National de la Recherche Agronomique (INRA), vol. 97(4).
    12. Rault, Arnaud & Krebs, Stephane, 2011. "Livestock epidemics and catastrophic risk management: State of the art and prospects on economic dynamics," 2011 International Congress, August 30-September 2, 2011, Zurich, Switzerland 114793, European Association of Agricultural Economists.
    13. Niemi, Jarkko K. & Lyytikainen, Tapani & Sahlstrom, Leena & Virtanen, Terhi & Lehtonen, Heikki, "undated". "Risk Classification in Animal Disease Prevention: Who Benefits from Differentiated Policy?," 2009 Annual Meeting, July 26-28, 2009, Milwaukee, Wisconsin 49307, Agricultural and Applied Economics Association.
    14. Saak, Alexander E., 2012. "Infectious Disease Detection with Private Information," 2012 Annual Meeting, August 12-14, 2012, Seattle, Washington 124732, Agricultural and Applied Economics Association.
    15. Tong Wang & Seong Cheol Park, 2014. "Livestock Disease Indemnity Design under Common Uncertainty: A Multi-agent Problem," Economics Bulletin, AccessEcon, vol. 34(3), pages 1396-1409.
    16. Osseni, Abdel Fawaz & Gohin, Alexandre & Rault, Arnaud, 2022. "Optimal Biosecurity Policy with Heterogeneous Farmers," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 47(2), May.
    17. Romain Espinosa & Damian Tago & Nicolas Treich, 2020. "Infectious Diseases and Meat Production," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 76(4), pages 1019-1044, August.
    18. Linda Fernandez & Glenn Sheriff, 2013. "Optimal Border Policies for Invasive Species Under Asymmetric Information," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 56(1), pages 27-45, September.
    19. Tong Wang & David A. Hennessy, 2012. "Modeling Interdependent Participation Incentives: Dynamics of a Voluntary Livestock Disease Control Program," Center for Agricultural and Rural Development (CARD) Publications 12-wp527, Center for Agricultural and Rural Development (CARD) at Iowa State University.
    20. Delmond, Anthony R. & Ahmed, Haseeb, 2021. "Optimal Antimicrobial Use under Countervailing Externalities," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 46(3), September.

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