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04/18/23

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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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.

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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

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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

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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)

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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

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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

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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”

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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

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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”. 

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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

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Total Focus (1)

Incremental Focus(2)

(3)

(save resources if q desirable)

),,(),,( qpmVqqpWTPmV

)( choiceofobjectbaselineq

changeq

tradeoffWTP

0 dqVdmV qm

m

q

V

V

dq

dm

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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)

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VSL).,..,.,( 1 Jrrp

)().,..,,()()).,..,,(1( 11 WUrrpWUrrpEU AJDJ

0)()1()(

)]()()[/(

WUWU

WUWUp

dp

dWVSL

DA

DA

(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.

dp

dw

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Opportunity Cost of TimeMax: 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

M

M

M

'fptimeofvalueshadowU

Us

x

H

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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

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

Exit Objective Exit Benefit Measure

Biometrically verify alien identity

Increased National Security

Qualitative: reduction of 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

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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

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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)

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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

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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

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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

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Threat Point Source of Threat

Outset of Travel

During Travel

•Take Off

•Landing

Composite Perception of Security and “Cost” of Travel

Viability of Airline System

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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.

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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•Identifying ancillary benefits from policies not related to homeland security

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Potential Complementarities in Protection Activity that can also be exploited for analysis a

Terrorist attack

Natural disaster

Industrial disaster

1. Prevention to stop attacks

X

2. Prevention to deter attacks

X

3. Prevention to eliminate natural or industrial disasters

X X

4. Protection to reduce damage

X X X

5. Protection by physical separation

X X X

a Source: May et. al. [2006]

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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.)

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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?

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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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