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

15 Pages Posted: 28 Apr 2020

See all articles by Ben Gramig

Ben Gramig

University of Illinois at Urbana-Champaign

Richard D. Horan

Michigan State University - Department of Agricultural Economics

Christopher A. Wolf

Michigan State University - Department of Agricultural Economics

Multiple version iconThere are 2 versions of this paper

Date Written: August 2009

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.

Keywords: adverse selection, asymmetric information, indemnity design, livestock disease management, moral hazard, principal–agent model

Suggested Citation

Gramig, Benjamin and Horan, Richard D. and Wolf, Christopher A., Livestock Disease Indemnity Design When Moral Hazard is Followed by Adverse Selection (August 2009). American Journal of Agricultural Economics, Vol. 91, Issue 3, pp. 627-641, 2009, Available at SSRN: https://ssrn.com/abstract=3585800 or http://dx.doi.org/10.1111/j.1467-8276.2009.01256.x

Benjamin Gramig (Contact Author)

University of Illinois at Urbana-Champaign ( email )

United States

HOME PAGE: http://www.bengramig.com

Richard D. Horan

Michigan State University - Department of Agricultural Economics ( email )

303A Agriculture Hall
East Lansing, MI 48824
United States
517-355-1301 (Phone)
517-432-1800 (Fax)

Christopher A. Wolf

Michigan State University - Department of Agricultural Economics ( email )

East Lansing, MI 48824
United States

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