Comments on “You Can
Only Die Once”
Peter R. Orszag
The Brookings Institution
April 12, 2002
The Brookings Institution, Washington, D.C.
www.brookings.edu
Fundamental issue
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Are decentralized market forces
sufficient to provide proper
incentives for homeland security?
EPA official: chemical “industry has
a very powerful incentive to do the
right thing. It ought to be their worst
nightmare that their facility would be
a target of a terrorist act because
they did not meet their responsibility
to their community.” Statement of Bob Bostock,
assistant EPA administrator for homeland security, quoted in James
Grimaldi and Guy Gugliotta, Chemical Plants are Feared as Targets,
Washington Post, December 16, 2001, page A1.
The Brookings Institution, Washington, D.C.
www.brookings.edu
Insight from paper
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Decentralized approach does not
necessarily provide proper
incentives because of contamination
In effect, my security depends on
your security effort
In good equilibrium, both invest in
security and contamination
muted/eliminated
In bad equilibrium: Since everyone
else is not investing in security, your
incentives to invest are muted.
Nothing to prevent bad equilibrium
from arising and being perpetuated
The Brookings Institution, Washington, D.C.
www.brookings.edu
Other motivations for
government intervention
 Externality #1: Contamination
effects (Kunreuther and Heal)
 Externality #2: National
sovereignty (just as an invasion
of the nation’s territory by
enemy armed forces)
 Information costs
 Bankruptcy laws
 Moral hazard/bail out
 Incomplete markets
The Brookings Institution, Washington, D.C.
www.brookings.edu
Two other effects:
Endogenous targets/displacement
• Contamination effect suggests that my
investment in security provides a positive
externality for you, by reducing the risk of
contamination
• But opposite may be true for observable
security measures, given that the selection of
targets is endogenous: My investment may
make it more likely that terrorists will target
you, rather than me
• Related work on observable and
unobservable crime prevention steps
• In other words, p (and perhaps q) may
depend on relative security spending in
addition to absolute spending
• Requires continuous c, or discrete levels
• Possible to have over-investment rather than
under-investment
The Brookings Institution, Washington, D.C.
www.brookings.edu
Two other effects: Incentives
from public programs
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Related work examines the impact of
public provision of security on
private incentives
Orszag and Stiglitz, “Optimal Fire
Departments,” Brookings, January
2002
Presence of a fire department (or
public security program) can
exacerbate the social costs
associated with the underlying
negative externality
The Brookings Institution, Washington, D.C.
www.brookings.edu
Types of intervention
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Insurance
o
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Liability
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o
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Bankruptcy
Definition of adequate effort
Tax fines or subsidies
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o
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Mandate vs. voluntary
Pricing
Reinsurance
Fines: Political viability
Subsidies: Gold plating and budget outlook
Regulation
Coordinating mechanisms
o
o
Anti-trust concerns
Clusters of high-security groups
The Brookings Institution, Washington, D.C.
www.brookings.edu
Slippery slope?
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Especially given the potential for
government failure and displacement
effect, how to draw the line?
Forthcoming Brookings volume
(Protecting the American Homeland)
sets one possible standard: Loss of
thousands of lives, or interruption of
millions of lives for significant period
So worry about stadiums, but not
small shopping malls
The Brookings Institution, Washington, D.C.
www.brookings.edu
Possible next steps for
research
• Imperfect information and monitoring
costs – crucial for implementing many
of the suggestions
• Endogenous target
selection/displacement
• Empirical evidence on size of
contamination effect relative to direct
threat/internal benefits (fn 7)
The Brookings Institution, Washington, D.C.
www.brookings.edu