Skip to main content
Real Options Conference 2023

Full Program »
View File

Investment In Biosecurity With Spillover Effects Among Rivals

The increased prevalence of infectious diseases affecting plants and the magnitude of monetary damages from infection suggest a strong incentive for control measures which reduce transmission likelihood. However, control is costly and generates positive spillover effects, reducing the infection likelihood not only for one area/firm but also for neighbouring sites. If decision-makers consider only internal costs and benefits, this gives rise to a second-mover advantage problem: Control by firm A benefits firm B by reducing B's expected loss from infection. However this delays firm B's implementation of costly control, which in turn reduces A's incentives to control as first-mover.

We initially consider how these spillover effects alter investment incentives in the absence of competitive interactions when the decision-maker internalises the spillover benefits of biosecurity measures between sites, i.e. when it is optimal for a single decision-maker to implement biosecurity controls on each of two distinct sites. We investigate the trade-off between sequential and simultaneous control where biosecurity measures have different costs and levels of risk reduction and, as in Kort, Murto and Pawlina (2010), find the flexibility advantage means sequential control dominates unless simultaneous control has a sufficiently high cost advantage.

We next consider the case where biosecurity decision-making is on a site-by-site basis (e.g. sites owned by competing enterprises), so positive spillovers are ignored. This delays initial control and reduces value for both firms/sites (relative to the combined decision-making case). In future work we will investigate incentives for negotiated simultaneous control and the impact of transfers between the parties.

Elizabeth Whalley
University of Warwick
United Kingdom


Powered by OpenConf®
Copyright ©2002-2022 Zakon Group LLC