WEAI/AERE 2009 - Individual Paper Abstract
Title: Optimal Invasive Species Policies Under Asymmetric Information
Author(s): Linda FERNANDEZ, University of California, Riverside, linda.fernandez@ucr.edu; Glenn Sheriff, Columbia University
Abstract:
This paper analyzes policies to reduce unintentional introductions of land-based invasive species from agricultural imports. We examine cases in which the exporter has better information than the importing country's border protection agency regarding the baseline riskiness of a shipment, and can undertake unobservable (to the importer) effort to abate this risk. The framework enables investigation into how importers and exporters can cooperate on ex ante preventative and/or ex post strategies to address invasive species under conditions of adverse selection and moral hazard.
Our research is most closely related to previous work on food safety inspection and compensation policies, and optimal import tariffs with invasive risk. The food safety literature has either examined optimal inspection for homogeneous producers under pure moral hazard (e.g., Starbird 2005), or held inspection rates exogenous (e.g., Gramig et al. 2008). The invasive trade literature (e.g., McAusland and Costello 2004) has examined optimal inspection rates, but only under conditions of symmetric information regarding risk. Our paper expands on this literature, examining a broader range of policy instruments under conditions of both moral hazard and adverse selection. Unlike past literature, our model also takes into account the high perishability of many commodities, incorporating a depreciation in value as a function of inspection intensity. We analyze possible cooperation among multiple importers in the context of the North American Plant Protection Organization.
The probability that a shipment is infected is a function of an exporter's idiosyncratic risk parameter (an exporter's type), abatement effort undertaken by the exporter to reduce the probability of infection, and technical assistance provided by the importing country (e.g., training on management practices). The idiosyncratic risk is assumed to be exogenous to the exporter (e.g., local environmental conditions, or size of local pest populations) and known to the exporter but not the importer. Abatement effort is also privately known by the exporter, but endogenously chosen. (Technical assistance is known to both exporter and importer.)
The importing country's border protection agency goal is to maximize social welfare which includes consumer surplus from imports less damage from invasives that are not caught and cost of inspection, transfers, and technical assistance. Inspections take time, so increasing inspection intensity causes the value of the good (for both the importer and exporter) to depreciate.
The regulator faces three constraints in designing the policy. First, since the regulator cannot observe type, each exporter must maximize profit by choosing the contract intended for him. Second, exporters cannot expect to earn negative profit from the program. Third, the abatement effort chosen by the exporter maximizes his profit conditional on his inspection intensity, transfer, technical assistance, and idiosyncratic risk.
As an example, we apply this analysis to the North American Plant Protection Organization, which involves coordination between multiple importing countries in North America and their trading partners. The case studies we discuss in the context of the model include wood packaging that presents an example of how a North American regional effort was elevated to an international level of coordination for technical assistance, preclearance and inspection protocol. Also, bulbs are plants for planting and provide a successful example of preclearance that is coordinated by Canada, the U.S. and Mexico in conducting inspection in Holland as a means of reducing damage and costs of shipment. Seed potatoes traded as plants for planting from Canada to Mexico involve a within North America coordination example of controlling soil born invasive species such as potato cyst nematode as well as bacteria and viruses. The final example involves an informal clean stock program that illustrates the effort the importing country may make in terms of rigorous technical assistance and ex ante coordination with the exporter in this case for traded horticulture of dracaena, a corn like stalk that is an ornamental. In this case, the US Animal and Plant Health Inspection Service has coordinated efforts in Costa Rica to establish management practices to reduce invasive risk.