The Design of a Benefit-Cost
Architecture for
Homeland Security Policy Analysis
V. Kerry Smith (Arizona State University, RFF, NBER)
Carol Mansfield (RTI International)
Prepared for
Estimating the Benefits of Homeland Security Policies
September 23 & 24, 2010
Funded by CREATE@USC
4/13/2015
www.rti.org
1
Analysis is Especially Important in
Challenging Economic Times
“Regulations must be designed in a way that promotes, and does
not undermine, the continuing recovery. A transparent
accounting of consequences – of costs and benefits – is
indispensable. If we look before we leap, with a commitment to
openness, we are going to be finding unprecedented
opportunities for improving and even extending people’s lives.”
(pp23-24)
Sunstein, Cass R., 2010. “Humanizing cost benefit analysis” Remarks prepared for the
Administrative Law Review Conference, American University, Washington College of Law,
Washington, D.C.
4/13/2015
www.rti.org
Objectives
 Measuring benefits for benefit-cost analysis
 Steps to define benefits
 Use Secure Flight as example
 Tradeoffs from revealed and stated preference work
 VSL and Opportunity Cost
 Choice Experiments
 Describing Architecture for Policy Analysis and relation
to defining benefits
 Need to consider who are the affected economic agents
4/13/2015
www.rti.org
Steps to Define and Measure Benefits
 Rule or policy has list of actions or tasks
 Link tasks to expected outcomes for individuals
 Expected outcomes to objects of choice
 Quantitative or qualitative measures for objects of
choice
 Baseline, change if rule implemented, define affected
groups
 Evaluate trade-offs individuals would make to get
changes (value) and the extent of the market
4/13/2015
www.rti.org
4
4/13/2015
www.rti.org
Example: Secure Flight RIA
 General Description
 Transfer, from aircraft operators to federal
agencies, the tasks associated with conducting
pre-flight comparisons of airline passenger
information with the Federal Government’s watch
lists
 Allows for access to gate area by some nontraveling individuals (for example, escorting a
minor or passenger with disabilities)
4/13/2015
www.rti.org
6
Actions Listed in Secure Flight
(examples)
 TSA will assume the domestic watch list matching
function from aircraft operators
 TSA will assume from the U.S. Customs and Border
Protection the responsibility for comparing passenger
information to government watch lists for certain
domestic and foreign aircraft operators
 Airlines transmit information on passengers and nontravelers to TSA
 TSA can ask airlines to require additional
4/13/2015identification from passenger
www.rti.org
7
Actions to Expected Outcomes (from RIA)
• Improved security in airports and on airlines
• Greater access for non-traveling individuals
• Reduced false positives or misidentification of
travelers as potential security threats
• Increased watch list security
• Boarding pass authentication
4/13/2015
www.rti.org
Expected Outcomes to Objects of Choice
 Objects of choice are the set of things over which
people have preferences
 From microeconomic theory to provide a general
description for the relationship between consumers’
choices and the observed patterns of demand
 People can have preferences for anything
 less tangible goods like “peace of mind when risks are
reduced”
4/13/2015
www.rti.org
9
Objects of Choice, con’t
 For many (most?) DHS rules, the objects of choice
will not be market goods
 Objects of choice will be risk reductions, opportunity
cost of time, level of privacy, amount of hassle
 These objects of choice can be complements with
decisions we observe the individual making like
purchasing tickets
4/13/2015
www.rti.org
10
Objects of Choice for Secure Flight,
Example
 Household production function one way to think about
less tangible objects of choice:
 U(Leisure time activities)
 Leisure travel = f(equipment, transportation, lodging,
activities, time)
 Transportation = f(cost of tickets, time, fear of terrorist
attack on an airplane).
 Objects of choice for Secure Flight might be “fear of a
terrorist attack” and “time spent waiting in security”.
4/13/2015
www.rti.org
11
Example, con’t
 Risk of terrorist attack on airplanes and tickets are
complements
 Demand for airline tickets will increase as risk
decreases, will provide some information about
preferences for risk
4/13/2015
www.rti.org
12
Total Focus
V (m  W TP, p, q  q)  V (m, p, q)
(1)
q  baseline(objectof choice)
q  change
W TP tradeoff
Incremental Focus
Vm dm  Vqdq  0
Vq
dm

dq
Vm
4/13/2015
www.rti.org
(save resources if q desirable)
(2)
(3)
Heterogeneity in WTP and in demand for
complement
 WTP for change in object of choice affected by
 How the rule is implemented (mechanism for achieving
risk reduction)
 Baseline level
 Size of change
 Demand for complement (airline tickets) will vary
across individuals
 Differences across individuals in elasticity of demand
(business travelers vs. leisure travelers)
4/13/2015
www.rti.org
14
VSL
   ( p, r1 ,.. . ., rJ )
(4)
EU  (1   ( p, r1 , . . ., rJ ))U D (W )   ( p, r1 , . . ., rJ )U A (W )
(5)
( / p )[U A (W )  U D (W )]
dW

0
dp
U A (W )  (1   )U D (W )
(6)
VSL 
dw
VSL is measured by considering dp from the number (N) of people willing to
pay this amount so risk change and N imply fatalities reduce by one.
4/13/2015
www.rti.org
Opportunity Cost of Time
Max:
Subject to:
u(x, H, M )
y= income
x= numeraire (price=unity)
H= leisure
M = household work (pre-determined time)
T= total time (net work)
y = x+ps [ M - f (T-H)]
Issues:
1) Do we define y in terms of earnings W.TW so T=Tt-Tw
2) If the answer is no then what margin do we use to get
value of time
4/13/2015
www.rti.org
UH
 shadowvalueof time  p s  f '
Ux
Extent of the Market
 Extent of the market: defining who is affected by the
rule
 Need to assign objects of choice to each group
 Travelers: reduced risk of attack, reduced risk of being
mistakenly identified as on the watch list
 Parents of traveling children: greater security for
children traveling alone, reduced risk of attack
4/13/2015
www.rti.org
17
Example from Biometric Exit RIA
(Table 5-2 in RIA)
Exit Objective
Exit Benefit
Measure
Biometrically
verify alien
identity
Increased
Qualitative: reduction of
National Security terrorism costs due to border
security, unquantified
security benefits
Mechanism to
identify visa
overstays
Improved
detection of visa
overstays
Percentage of visa overstays
detected,
Cost savings from identifying
visa over-stayer before
reentry to US
4/13/2015
www.rti.org
18
Defining and Measuring Benefits:
Examples from our work
 5 years ago we initiated a modest program of
research to design and implement three stated
preference surveys measuring the benefits of some
security programs
 The surveys were exploratory, not clear whether we
could describe the “goods” and people could answer
the questions
4/13/2015
www.rti.org
19
Threat of Shoulder-Mounted Missile
Attack on Airplanes
 Plans
 MANPADS (missile defense technology)
 Training for pilots if plane hit
 Patrol airport perimeter
 Attributes varied: Waiting time in security, cost
 Payment vehicles: Gasoline tax, income tax
 Link for benefit transfer: opportunity cost of time, (risk
of attack not specified)
4/13/2015
www.rti.org
20
Food Safety
 Plans
 More FDA inspectors
 Home test kit for use before cooking
 Medicine if get sick
 Varied: risk of illness, severity of illness, cost, time to
use test kit when cooking
 Payment vehicle: income tax, cost of kit or medicine
 Link for benefit transfer: risk and severity of illness,
opportunity cost of time
4/13/2015
www.rti.org
21
Dirty Bombs
 Plans
 Build facilities to shelter in place
 Monitors and cameras to detect radioactive material
 Plan and practice evacuating the city
 Varied map showing example of dirty bomb (40
maps), leave days used to practice evacuation
 Payment vehicle: income tax
 Link to benefit transfer: opportunity cost of time,
geographic variation across metro areas
4/13/2015
www.rti.org
22
Policy Analysis Architecture
 A framework to link the regulations to the
consequences for people, firms, and other institutions
in ways that allow the benefits and costs of each
change to be clearly articulated and assessed.
 Must be general enough to accommodate a wide
variety of rules
 EPA uses risk management, their policy analysis
centers around risk assessment
4/13/2015
www.rti.org
23
Passengers
Maintenance
Operations
Outset of Travel
Cargo
Shoulder
Mounted
Missiles
Disrupt Air Traffic
Control
Small Planes As
Weapon
During Travel
•Take Off
•Landing
Composite
Perception of
Security and
“Cost” of Travel
Risk of Travel
Time Required
and Cost of
Security
Overhead Cost
of the System
Viability of Airline
System
4/13/2015
www.rti.org
Threat Point
Source of Threat
Analysis Framework Organized Around
Preparedness
 May, Michael, Lynn Eden, Patrick Roberts, and Jacob
N. Shapiro. 2006. An Analytic Approach to
Preparedness for Homeland Security. Stanford CA:
Center for International Security and Cooperation;
Freeman Spogli Institute for International Studies.
4/13/2015
www.rti.org
25
Events:
What are the consequences in terms of capabilities based
planning?
Prevention and Protection:
What capabilities are needed to prevent and protect?
What performance measures are needed to assess these
capabilities?
Response and Recovery:
What capabilities are needed to respond and recover?
What performance measures are needed to assess these
capabilities?
Crosscutting elements of Preparedness:
•Allocating finite resources under conditions of uncertainty
•Prioritizing what to protect
•Structuring incentives for complementary private action
•Recognizing the endogeneity in the responses to some threats
4/13/2015
•Identifying
ancillary benefits from policies not related to
www.rti.org security
homeland
26
Potential Complementarities in Protection Activity
that can also be exploited for analysis a
1. Prevention to stop
attacks
2. Prevention to deter
attacks
3. Prevention to eliminate
natural or industrial
disasters
4. Protection to reduce
damage
5. Protection by physical
separation
4/13/2015
www.rti.org
Terrorist
attack
X
Natural
disaster
Industrial
disaster
X
X
X
X
X
X
X
X
X
a
Source: May et. al. [2006]
Moving to Architecture for
Analysis
What will be the Focus of Rules?
•Ex ante risk reduction
•Ex ante consequence reduction
•Ex post response
•Composite—need to consider different benefit
concepts (certainty equivalent, option price, etc.)
4/13/2015
www.rti.org
Importance of Feedback
 Evaluation should include reviewing economic
analysis for past rules
 What did the analysis capture and what did it miss?
 In the decision-making process, how was the analysis
used? Which parts were most useful?
 What methods provided most information?
4/13/2015
www.rti.org
29
Conclusion
 The development of an organization’s analysis
capacity takes place within the context of the group’s
goals
 Benefit-cost analysis provides policy makers a
systematic evaluation based on economic theory of
what policies that restrict private activities or manage
resources held in public trust are expected to
accomplish
 The structure, methods and outcomes evaluated will
be shaped by the policy architecture that evolves in
DHS
4/13/2015
www.rti.org
30