Behavioral Incentives, Equilibrium Endemic Disease, and Health Management Policy for Farmed Animals

David A. Hennessy
December 2005  [05-WP 418]

We develop a dynamic capital valuation model in which each farm can take an action with farm-varying cost to increase the probability of not contracting a disease. In the presence of infection externalities, circumstances are identified under which multiple equilibria exist and where the one involving the most extensive set of action takers is socially optimal. It is suggested that costly capital markets are one factor in determining the extent of endemic disease in a region. The introduction of frictions, such as dealing with a cumbersome veterinary public health bureaucracy, can enhance social welfare by encouraging precautionary biosecurity actions. Some technical innovations can reduce social welfare. The model is also extended to study a voluntary herd depopulation scheme. Moral hazard in the biosecurity action will dampen the scheme's welfare effect.

Keywords: biosecurity, continuous time, multiple equilibria, Nash behavior, reinfection.

JEL classification: D20, H4, Q1

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