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The Design of a Benefit-Cost Architecture for Homeland Security Policy Analysis

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.

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The Design of a Benefit-Cost Architecture for Homeland Security Policy Analysis

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  1. 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

  2. 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.

  3. 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. 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

  5. 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 non-traveling individuals (for example, escorting a minor or passenger with disabilities)

  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 non-travelers to TSA • TSA can ask airlines to require additional identification from passenger

  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

  8. 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”

  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

  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”. 

  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

  12. Total Focus (1) Incremental Focus (2) (3) (save resources if q desirable)

  13. 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)

  14. VSL (4) (5) (6) VSL is measured by considering from the number (N) of people willing to pay this amount so risk change and N imply fatalities reduce by one.

  15. Opportunity Cost of Time Max: u(x, H, ) y= income x= numeraire (price=unity) H= leisure = household work (pre-determined time) T= total time (net work) Subject to: y = x+ps [ - f (T-H)] Issues: Do we define y in terms of earnings W.TW so T=Tt-Tw If the answer is no then what margin do we use to get value of time

  16. 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

  17. Example from Biometric Exit RIA (Table 5-2 in RIA)

  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

  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)

  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

  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

  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

  23. During Travel Composite Perception of Security and “Cost” of Travel Viability of Airline System Outset of Travel • Take Off • Landing Source of Threat Threat Point

  24. 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.

  25. Potential Complementarities in Protection Activity that can also be exploited for analysis a aSource: May et. al. [2006]

  26. 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.)

  27. 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?

  28. 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

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