Livestock disease indemnity design when moral hazard is followed by adverse selection

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

Research output: Contribution to journalArticlepeer-review

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.

Original languageEnglish (US)
Pages (from-to)627-641
Number of pages15
JournalAmerican Journal of Agricultural Economics
Volume91
Issue number3
DOIs
StatePublished - 2009
Externally publishedYes

Keywords

  • Adverse selection
  • Asymmetric information
  • Indemnity design
  • Livestock disease management
  • Moral hazard
  • Principal-agentmodel

ASJC Scopus subject areas

  • Agricultural and Biological Sciences (miscellaneous)
  • Economics and Econometrics

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