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Abstract

We employ a game-theoretic principal agent framework to analyze the individual farmer and governmental behavior pre- and post-animal disease outbreak. We examine the gap between the privately optimal and socially optimal levels of ex ante biosecurity investment and then investigate how a well-designed differentiated compensation scheme can close this gap. Our results also show that the privately optimal investment is generally lower than the first best socially optimal level, and a well-designed differentiated compensation scheme conditional on ex ante biosecurity investment can induce private preventive investment at least greater than the second best socially optimal level when the government face constraints, or even increase approaching the first best socially optimal level. Furthermore, our results suggest that compensation schemes be expanded to encompass features that provide incentives for ex ante biosecurity investment and ex post truthful disclosure. Specifically inclusion of the following two mechanisms is warranted: (a) a penalty for farms who are found to have disease incidence but have not disclosed that information.

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