Paper Number: 2010-03

Document Date: 03/26/2010

Author(s): Linda Fernandez and Glenn Sheriff

Subject Area(s): Pollution Control Options and Economic Incentives; International Trade

Keywords: asymmetric information; inspection; international trade; invasive species

Abstract: This paper analyzes border protection policies for managing risk of unintended imports of invasive species. Previous work typically assumes invasive species risk to be exogenous and commonly known. Here, we examine cases in which endogenous actions (exporter abatement) affect risk and allow for unobservable differences in exporter abatement cost. We show how the optimal inspection/penalty regime differs in such cases from that derived for homogeneous exporters. The information asymmetry also makes it optimal for the regulator to provide technical assistance grants even if it would be otherwise inefficient to do so. Further, we show that the fungibility of technical assistance with inputs in other sectors of the exporting economy significantly affects the qualitative nature of the optimal policy. If it has no outside value in the exporter’s country, the optimal policy is characterized by a menu of contracts trading off higher tariffs with lower penalties for being caught with an invasive. If technical assistance can be used in other sectors of the exporter’s economy, it introduces countervailing incentives that make it optimal for the regulator to use a uniform tariff/penalty combination for all exporters.

This paper is part of the Environmental Economics Working Paper Series.

• Optimal Border Policies for Invasive Species under Asymmetric Information (PDF)(23 pp, 540 K, 03/2010)