Premium
Livestock Disease Indemnity Design When Moral Hazard Is Followed by Adverse Selection
Author(s) -
Gramig Benjamin M.,
Horan Richard D.,
Wolf Christopher A.
Publication year - 2009
Publication title -
american journal of agricultural economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.949
H-Index - 111
eISSN - 1467-8276
pISSN - 0002-9092
DOI - 10.1111/j.1467-8276.2009.01256.x
Subject(s) - biosecurity , indemnity , adverse selection , business , incentive , payment , moral hazard , livestock , government (linguistics) , ex ante , outbreak , public economics , actuarial science , economics , finance , medicine , biology , linguistics , philosophy , macroeconomics , pathology , virology , microeconomics , ecology
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.