Andrew Samuel

Resource Allocation for Homeland Defense: Dealing with the Team Effect

The federal governments allocation of resources for defense against potential attacks generally involves depending on a multitiered organization consisting of federal, state, and local agencies for information on the risks faced in their jurisdictions and the costs and benefits of defensive actions they may take. These agencies then receive resources, ideally based on the collectively reported risks and resource needs. With private information about local risks and defensive actions and limited resources at the federal level, there are ample opportunities for agencies to take advantage of such a system for their benefit. This yields a suboptimal allocation of limited defensive resources. In this paper we describe this allocation problem formally as a game between a single principal (e.g., Congress) and agents representing more local agencies. This differs substantially from the treatment of the attacker--defender problem in the literature, where the defender is treated as a single, unified decision maker. We show that ignoring the within-team defender interactions in modeling the attacker--defender game leads to a suboptimal resource allocation. Existing results from agency theory are applied to this problem together with new results and insights into the interactions between an attacker and a multilevel defender.

“Fair Trade,” Market Failures, and (the Absence of) Institutions

This paper presents an analysis of Fair Trade using a general equilibrium model of an economy where externalities are present and where the institutional or legal framework needed to regulate these externalities may be weak. Weak institutions and externalities are common in the developing world, where Fair Trade is targeted, making perfect competition models inappropriate measures of the value of Fair Trade. Members of Fair Trade cooperatives are required to adopt sustainable production methods, and not employ other socially harmful practices such as child-labor. Thus, Fair Trade organizations can serve as a complement to the existing weak institutions in the economy, creating incentives for entrepreneurs to move from the informal to the formal sector. Specifically, the analysis confirms that in many cases an increase in the Fair Trade premium can reduce the overall level of harmful activities, even from those producers who are not Fair Trade certified, and thereby raise welfare.

Gaming the System: Decision Making by Interdependent Critical Infrastructure

Supporting strong, resilient, and integrated critical infrastructure is vital to upholding the U.S. economy and its national security. Arguably, no sector of the economy could exist without the reliable and predictable networks on which it depends. To date, the research on interdependent infrastructure has concentrated on describing the sources of the dependencies and developing models for predicting performance and cascading disruptions after a hazardous event. However, these models fail to capture the perspective of the operators of these networks and how competing, independent objectives lead to suboptimal investment decisions and hence suboptimal network performance. Rather than focus on how interdependent infrastructures operate and possibly fail, we take the perspective of their operators and ask why they make the decisions that they do. The goal of this paper is to demonstrate how strategic interdependencies may impact performance of coupled systems by shifting investments away from what is collectively best toward decisions that are more myopic and optimal from the perspective of a single infrastructure. Through our model, we make inferences on the level of investments networks make, relate this to performance, and provide policy recommendations on how to promote reliable infrastructure.

The effect of de-hubbing on airfares

This paper studies the price effect of de-hubbing, which occurs when an airline ceases hub operations at an airport. We develop a simple theoretical model to study the impact of de-hubbing on prices and quantities of direct flights at the hub airport. Using an event study of seven cases of de-hubbing between 1993 and 2009, we analyze how average airfares change following de-hubbing. Consistent with the theoretical implications, the empirical results suggest that airfares decrease when there is a low-cost carrier presence at the de-hubbed airport, whereas airfares increase when the de-hubbed airport is not serviced by a low-cost carrier.

Announced vs. Surprise Inspections with Tipping-Off

This paper analyzes a model in which a firms compliance with regulation is monitored by a supervisor. The supervisor exerts costly, unobservable effort to raise his inspection intensity, which leads to moral hazard. A non-compliant firm may exert effort in avoidance to reduce the probability of sanction. The regulatory framework is such that inspections may be announced or unannounced. Our analysis derives novel results about the response of monitoring and avoidance to changes in inspection policies, as well as conditions under which a regulator who maximizes compliance prefers unannounced to announced inspections. When the supervisor is corruptible, unannounced inspections are susceptible to a tip-off from the supervisor to the firm in exchange for a bribe. To eliminate bribery, the regulator may reduce the frequency of inspections. However, in an example, we show that eliminating tipping-off may lead to lower compliance unless the supervisors wage is raised.

Pre‐Emptive Corruption, Hold‐Up and Repeated Interactions

This paper analyses repeated interactions between a firm and an inspector who monitors regulatory compliance. The firm may offer a bribe to pre-empt the inspection. Corruption is unfeasible in the one-shot game because of inspector hold-up. In an infinitely repeated game, we characterize the set of bribes that can be sustained as equilibrium paths using the trigger strategy. In this model, the most likely bribe-givers are not the firms that benefit the most from the illegal behaviour. Furthermore, strengthening anti-corruption policies has ambiguous welfare effects because it improves compliance only among a subset of firms, and increases monitoring effort.

A Note on Licenses in the Presence of Corruption

Abstract We study the effectiveness of licenses in environments with corruption. We expand the standard model so that bribery is feasible not only when licenses are granted but also when enforced or verified. This modification alters many prior results on bribery and licensing significantly. Specifically, we show that in some cases penalties for bribery at the license-granting stage complement penalties for bribery at the permit-enforcement stage. In other cases, they act as substitutes for each other. These results are especially important for often used regulatory policies in which licenses are used in conjunction with some form of subsequent license verification. Thus, our model suggests that studying the impact of bribery at the license-granting stage should not be conducted without simultaneously studying bribery at the permit verification stage.