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

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

Abstract

Averting or limiting the outbreak of infectious disease in domestic livestock herds is an economic and potential human health issue that involves both 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, while simultaneously addressing the information asymmetry between producers and the government. We show how addressing the adverse selection problem leads to a risk-sharing tradeoff in the moral hazard problem. We compare the relative magnitude of the first- and second-best levels of biosecurity investment and indemnity payments to further demonstrate the tradeoff between risk-sharing and efficiency, and we discuss the implications for status quo U.S. policy.

Suggested Citation

  • Gramig, Benjamin M. & Horan, Richard D. & Wolf, Christopher A., 2008. "Livestock Disease Indemnity Design When Moral Hazard is Followed by Adverse Selection," 2008 Annual Meeting, July 27-29, 2008, Orlando, Florida 6542, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
  • Handle: RePEc:ags:aaea08:6542
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    References listed on IDEAS

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    Cited by:

    1. Saak, Alexander E., 2012. "Infectious disease detection with private information:," IFPRI discussion papers 1162, International Food Policy Research Institute (IFPRI).
    2. 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.
    3. 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.
    4. 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;Western Agricultural Economics Association.
    5. 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), August.
    6. Niemi, Jarkko K. & Lyytikainen, Tapani & Sahlstrom, Leena & Virtanen, Terhi & Lehtonen, Heikki, 2009. "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.
    7. 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.
    8. Fraser, Rob, 2016. "Compensation Payments and Animal Disease: Incentivising Farmers Both to Undertake Costly On-farm Biosecurity and to Comply with Disease Reporting Requirements," 2016 Conference (60th), February 2-5, 2016, Canberra, Australia 235307, Australian Agricultural and Resource Economics Society.
    9. 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.
    10. Arnaud Rault & St├ęphane Krebs, 2011. "Catastrophic risk and risk management, what do we know about livestock epidemics? State of the art and prospects," Working Papers SMART - LERECO 11-05, INRA UMR SMART-LERECO.
    11. 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.
    12. 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.

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    Keywords

    Food Consumption/Nutrition/Food Safety; Livestock Production/Industries; Risk and Uncertainty;

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