Why Compensation?

What’s the Goal of Veterinary Services?

Animal Health Safeguarding Disease Prevention Disease Control

Disease Prevention Disease Control Which is most important in protecting / safeguarding animal agriculture?  Disease Prevention  Reducing the environment for disease to enter or spread  Disease Control  Elimination of disease once it is established In terms of compensation there is tension between the two

Disease Control SurveillanceReportingEradication Clean Up

Disease Reporting Individual Perspective Individual Perspective to Suspicion of a highly contagious disease  Hoped for response  Call veterinarian or animal health official  Consequences if disease positive  Herd / flock depopulated  Surrounding herds / flocks depopulated  Economic losses  Genetic losses  Reduction in available meat protein  Government & Media Spotlight Not well liked by family, friends, neighbors & colleaguesNot well liked by family, friends, neighbors & colleagues

Disease Reporting Individual Perspective Individual Perspective to Suspicion of a highly contagious disease (continued)  Because of previous listed consequences possible likely responses are  Keep quiet, hope animals get better  Try to market sick animals before they die  Both lead to greater spread of the disease  Saying about individual disease response  Shoot  Shovel  Shut-up

Disease Reporting Industry / Government Perspective Industry / Government Perspective:  Individuals should report disease  Quick response  Limit spread  However, reporting is not necessarily in the individual’s best private interest Externality  Pay individuals to act in the public good  Economic justification for government to be involved in disease compensation  The greater the indemnity paid the greater the cooperation to report disease and agreement to animal depopulation

Compensation Through the Lens of Disease Prevention

Disease Prevention Border Security On-farm Biosecurity

Does On-Farm Biosecurity Increase or Decrease Profits? Function of costs and benefits Optimal biosecurity occurs where costs equals benefits Benefits function of  Effectiveness of biosecurity measures to prevent disease  Amount of potential losses  Value per head  Number of head

Government Compensation & Farm Biosecurity Expenditures Q. What is the impact of government compensation on optimal on-farm biosecurity expenditures? A. Compensation reduces losses realized  Which reduces benefit of biosecurity  Which reduces optimal on-farm biosecurity expenditures Conclusion: government compensation reduces private incentive to practice good biosecurity  Which works against VS’ Goal of Safeguarding Animal Health through Disease Prevention  Thus the tension between disease control and disease prevention in terms of compensation policy

Moral Hazard (Risks & Returns) RisksReturns Do the returns justify the risks? Activities / Programs that reduce the consequences of a risky choice gone “bad”, encourages people to engage in such behavior

Moral Hazard “Moral hazard is the prospect that a party insulated from risk may behave differently from the way it would behave if it were fully exposed to the risk.” (Wikipedia) If others are willing to “pay” for our mistakes or “rescue” us, then we are more likely to engage in risky behavior Example  How much more money would you spend at a casino if you were guaranteed to leave with 90% of the money you walked in with?

Moral Hazard Economic Law of Supply  The higher the price, the greater the quantity supplied Moral Hazard & Economic Law of Supply Combined  More you pay for diseased animals, the more diseased animals will be presented to government (Kuchler & Hamm, 2000) Is this a good thing?  Yes, if disease prevalence is independent of indemnity payment  Obtaining more animals now reduces future prevalence  No, if disease prevalence is positively correlated with indemnity payment  Future prevalence is increased

Compensation Balance Encourage Disease Reporting Disease Control Encourage Biosecurity Disease Prevention High Compensation Low Compensation Producer Incentive Pit of Moral Hazard

Compensation Balance Deliberate Disease Contact & Disease Spread Producer Incentive

What Compensation is Not Not to provide income subsidies to producers. Not to put them back into business, that’s the role of business interruption insurance.  Often owners want to replace with younger, more expensive animals which is why they may reject appraisal value

Compensation Summary Compensation Summary Compensation improves disease reporting which is a good thing, but too much compensation can result in reduced biosecurity and less than optimal disease prevention

Meaning for APHIS Employees who are asked to do Appraisals What is the right balance of compensation?  My Opinion: Fair market value isn’t too far off from optimal compensation if APHIS doesn’t compensate for lost income and doesn’t pay for cleaning and disinfection costs As APHIS appraisers our goal should be fair market value  Our long term creditability as appraisers is tied to well done appraisals that do a good job of determining and explaining value  Let program managers and regional administrators determine indemnity paid  Don’t let them influence your valuation  Remember the ethic rules