Why Compensation? Why Compensation?

What’s the Goal of What’s the Goal of Veterinary Services?Veterinary Services?

Animal Health SafeguardingAnimal Health Safeguarding

Disease PreventionDisease Prevention Disease ControlDisease Control

Disease PreventionDisease PreventionDisease Control Disease Control

Which is most important in protecting / Which is most important in protecting / safeguarding animal agriculture?safeguarding animal agriculture? Disease PreventionDisease Prevention

Reducing the environment for disease to enter or spreadReducing the environment for disease to enter or spread Disease ControlDisease Control

Elimination of disease once it is establishedElimination of disease once it is established

In terms of compensation there is tension In terms of compensation there is tension between the twobetween the two

Disease ControlDisease Control

Surveillance Surveillance

ReportingReporting

EradicationEradication

Clean UpClean Up

Disease ReportingDisease ReportingIndividual PerspectiveIndividual Perspective

Individual Perspective to Suspicion of a highly Individual Perspective to Suspicion of a highly contagious diseasecontagious disease Hoped for responseHoped for response

Call veterinarian or animal health officialCall veterinarian or animal health officialConsequences if disease positiveConsequences if disease positive

Herd / flock depopulatedHerd / flock depopulated Surrounding herds / flocks depopulatedSurrounding herds / flocks depopulated Economic lossesEconomic losses Genetic lossesGenetic losses Reduction in available meat proteinReduction in available meat protein Government & Media SpotlightGovernment & Media Spotlight

• Not well liked by family, friends, neighbors & colleaguesNot well liked by family, friends, neighbors & colleagues

Disease ReportingDisease ReportingIndividual PerspectiveIndividual Perspective

Individual Perspective to Suspicion of Individual Perspective to Suspicion of a highly contagious disease a highly contagious disease (continued)(continued) Because of previous listed consequences Because of previous listed consequences

possible likely responses arepossible likely responses areKeep quiet, hope animals get betterKeep quiet, hope animals get betterTry to market sick animals before they dieTry to market sick animals before they dieBoth lead to greater spread of the diseaseBoth lead to greater spread of the disease

Saying about individual disease responseSaying about individual disease responseShootShootShovelShovelShut-upShut-up

Disease ReportingDisease ReportingIndustry / Government PerspectiveIndustry / Government Perspective

Industry / Government Perspective: Industry / Government Perspective: Individuals should report diseaseIndividuals should report disease

Quick responseQuick responseLimit spreadLimit spread

However, reporting is not necessarily in However, reporting is not necessarily in the individual’s best private interestthe individual’s best private interest

ExternalityExternality Pay individuals to act in the public goodPay individuals to act in the public good Economic justification for government to Economic justification for government to

be involved in disease compensationbe involved in disease compensationThe greater the indemnity paid the greater The greater the indemnity paid the greater

the cooperation to report disease and the cooperation to report disease and agreement to animal depopulationagreement to animal depopulation

Compensation Through the Lens of Compensation Through the Lens of Disease Prevention Disease Prevention

Disease PreventionDisease Prevention

Border SecurityBorder Security On-farm BiosecurityOn-farm Biosecurity

Does On-Farm Biosecurity Does On-Farm Biosecurity Increase or Decrease Profits?Increase or Decrease Profits?

Function of costs and benefitsFunction of costs and benefitsOptimal biosecurity occurs Optimal biosecurity occurs where costs equals benefitswhere costs equals benefitsBenefits function ofBenefits function ofEffectiveness of biosecurity Effectiveness of biosecurity

measures to prevent diseasemeasures to prevent diseaseAmount of potential lossesAmount of potential losses

Value per headValue per headNumber of headNumber of head

Government Compensation Government Compensation & Farm Biosecurity Expenditures& Farm Biosecurity ExpendituresQ. What is the impact of government Q. What is the impact of government compensation on optimal on-farm compensation on optimal on-farm biosecurity expenditures?biosecurity expenditures?A. Compensation reduces losses A. Compensation reduces losses realized realized Which reduces benefit of biosecurityWhich reduces benefit of biosecurity

Which reduces optimal on-farm biosecurity Which reduces optimal on-farm biosecurity expenditures expenditures

Conclusion: government compensation Conclusion: government compensation reduces private incentive to practice reduces private incentive to practice good biosecuritygood biosecurity Which works against VS’ Goal of Which works against VS’ Goal of

Safeguarding Animal Health through Safeguarding Animal Health through Disease PreventionDisease Prevention

Thus the tension between disease control Thus the tension between disease control and disease prevention in terms of and disease prevention in terms of compensation policycompensation policy

Moral HazardMoral Hazard(Risks & Returns)(Risks & Returns)

RisksRisksReturnsReturnsDo the returns justify the Do the returns justify the risks?risks?Activities / Programs that Activities / Programs that reduce the consequences reduce the consequences of a risky choice gone of a risky choice gone “bad”, encourages people “bad”, encourages people to engage in such to engage in such behaviorbehavior

Moral HazardMoral Hazard““Moral hazard is the prospect that a Moral hazard is the prospect that a party insulated from risk may party insulated from risk may behave differently from the way it behave differently from the way it would behave if it were fully would behave if it were fully exposed to the risk.” (Wikipedia)exposed to the risk.” (Wikipedia)If others are willing to “pay” for our If others are willing to “pay” for our mistakes or “rescue” us, then we mistakes or “rescue” us, then we are more likely to engage in risky are more likely to engage in risky behaviorbehaviorExampleExample How much more money would you How much more money would you

spend at a casino if you were spend at a casino if you were guaranteed to leave with 90% of the guaranteed to leave with 90% of the money you walked in with?money you walked in with?

Moral HazardMoral HazardEconomic Law of Supply Economic Law of Supply The higher the price, the greater the The higher the price, the greater the

quantity suppliedquantity supplied

Moral Hazard & Economic Law of Moral Hazard & Economic Law of Supply CombinedSupply Combined More you pay for diseased animals, More you pay for diseased animals,

the more diseased animals will be the more diseased animals will be presented to government (Kuchler & presented to government (Kuchler & Hamm, 2000)Hamm, 2000)

Is this a good thing?Is this a good thing? Yes, if disease prevalence is Yes, if disease prevalence is

independent of indemnity paymentindependent of indemnity paymentObtaining more animals now reduces Obtaining more animals now reduces

future prevalencefuture prevalence No, if disease prevalence is positively No, if disease prevalence is positively

correlated with indemnity paymentcorrelated with indemnity paymentFuture prevalence is increasedFuture prevalence is increased

Compensation BalanceCompensation BalanceEncourage

Disease ReportingDisease Control

Encourage BiosecurityDisease Prevention

High CompensationHigh CompensationLow CompensationLow Compensation

Producer IncentivePit of Moral Hazard

Compensation BalanceCompensation Balance

Deliberate Disease Contact&

Disease Spread

Producer Incentive

What Compensation is NotWhat Compensation is Not

NotNot to provide income to provide income subsidies to producers.subsidies to producers.Not to put them back into Not to put them back into business, that’s the role of business, that’s the role of business interruption business interruption insurance.insurance. Often owners want to replace Often owners want to replace

with younger, more expensive with younger, more expensive animals which is why they animals which is why they may reject appraisal valuemay reject appraisal value

Compensation SummaryCompensation Summary

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

Meaning for APHIS Employees Meaning for APHIS Employees who are asked to do Appraisals who are asked to do Appraisals

What is the right balance of compensation?What is the right balance of compensation? My Opinion: Fair market value isn’t too far off from My Opinion: Fair market value isn’t too far off from

optimal compensation if APHIS doesn’t compensate optimal compensation if APHIS doesn’t compensate for lost income and doesn’t pay for cleaning and for lost income and doesn’t pay for cleaning and disinfection costs disinfection costs

As APHIS appraisers our goal should be fair As APHIS appraisers our goal should be fair market valuemarket value Our long term creditability as appraisers is tied to Our long term creditability as appraisers is tied to

well done appraisals that do a good job of well done appraisals that do a good job of determining and explaining value determining and explaining value

Let program managers and regional administrators Let program managers and regional administrators determine indemnity paiddetermine indemnity paidDon’t let them influence your valuationDon’t let them influence your valuationRemember the ethic rulesRemember the ethic rules