METHODS
Intentional introductions of nonindigenous species: a
principal-agent model and protocol for revocable decisions
Michael H. Thomas
a,*, Alan Randall
baAgribusiness Program,College of Engineering Sciences,Technology and Agriculture, Florida Agricultural and Mechanical Uni6ersity,302 Perry Paige South,Tallahassee,FL 32307, USA bDepartment of Agricultural,En6ironmental and De6elopment Economics,The Ohio State Uni6ersity,2120 Fyffe Road,
Columbus,OH 43210, USA
Received 8 October 1999; received in revised form 14 February 2000; accepted 11 April 2000
Abstract
Alien or genetically altered species, purposefully released to generate various benefits, may contribute to unantici-pated damage to the delicate balance of an existing ecosystem. In an ideal world, harm can be avoided in either of two ways: (1) perfect ex ante information would allow the choice of only beneficial releases; and (2) perfect revocability would allow ex post revocation of any release that turned out to be harmful. Currently, standard decision protocols regulating releases depend heavily upon ex ante information, which is often costly and uncertain due to highly complex ecosystems. We propose a more balanced approach that combines imperfect ex ante information with imperfect revocability. A principal-agent model is used to address moral hazards affecting purposeful releases. A model protocol is sketched to implement the concepts developed in this paper, paying particular attention to incentives that encourage releasing agents, to provide the optimal degree of revocability. © 2000 Elsevier Science B.V. All rights reserved.
Keywords:Invasive species; Intentional introductions; Principal-agent model; Decision theory; Revocability; Release protocol www.elsevier.com/locate/ecolecon
1. Introduction
While managing complex ecosystems, deliberate actions taken (or permitted) by public agencies or rent seeking agents may pose a risk of creating
potentially large and uncompensated economic losses to unwitting third parties. An example might be the decision to introduce a nonindigenous1 (exotic, alien or genetically
al-1While commonly termed exotics in many ecological
jour-nal, the term nonindigenous has gained prevalence following the Nonindigenous Aquatic Nuisance Species Control Act of 1990.
* Corresponding author. Fax: +1-850-5612441.
E-mail addresses: mthomas@electro-net.com (M.H. Thomas), randall.3@osu.edu (A. Randall).
tered) species in order to enjoy various expected benefits. Yet, such an action may disrupt the delicate balance of an existing ecosystem, causing unanticipated harm to third parties and, in the extreme, ecological devastation. Economic agents/ managers facing this type of difficult decision will often try to gather all available information about the host ecosystem and the nonindigenous species, to predict the effects of the introduction and minimize exposure to possible bad outcomes.
As an aid in the decision process, professional organizations, such as the American Fisheries So-ciety, have developed several protocols over the past 25 years to guide release efforts (Courtenay et al., 1984; Kohler and Stanley, 1984; Kohler and Courtenay, 1986). These protocols share the prin-cipal characteristic of relying heavily upon the collection of information useful for predicting likely outcomes prior to a release. This approach to information collection might mean studying how the nonindigenous species fits within its orig-inating ecosystem with the purpose of applying this knowledge to predict how the potential host ecosystem will function with the newly added species. With complex ecosystems, however, this pre-release or ex ante information can face two burdens: (1) it can be costly to gather; and (2) it may turn out to be unreliable for predictive pur-poses. The poor record of existing protocols in preventing harmful introductions may be partially due to their heavy reliance on ex ante informa-tion. The burden of fully understanding and pre-dicting the likelihood of outcomes prior to release has led to reluctance by many decision-makers to follow any release protocol. These agents may be frustrated for several reasons, not least of which is the difficulty of deciding when there is enough information to proceed responsibly with a release. In principle, the avoidance of bad outcomes can be accomplished in either of two ways: (1) assem-ble perfect ex ante information so that all strate-gies with bad outcomes can be avoided; or (2) only take actions with revocable outcomes, per-mitting the decision-maker to look at outcomes after-the-fact and reverse any action that leads to harm. While the process of revoking a decision is ex post, it still depends upon the ex ante selection of only those actions that can be reversed and
outcomes revoked. In the real world, neither per-fect ex ante information nor perper-fect revocability is likely to be attainable. Instead, one might expect increasing costs and diminishing returns from the pursuit of perfection with either approach. We propose to use this insight to develop an im-proved release protocol that balances the stress on ex ante information, evident in current protocols, with more attention to revocability.
We proceed by introducing the revocability principle and comparing it to the decision strategy of depending upon perfect ex ante information. Following this discussion, we examine the princi-ple of revocability within the framework of a principal-agent model and analyze the incentives for optimal provision of revocability under vari-ous assumptions. The results focus attention on ex ante assignment of liability and the use of assur-ance bonds to provide effective insurassur-ance against harmful outcomes. Finally, we apply these princi-ples to design an improved protocol for purpose-ful releases. For a detailed narration of the protocol, see Appendix A.
2. Analysis
2.1. Re6ocable decisions and ex ante information
One common decision heuristic is a strategy known as irreversible hill-climbing (Glover, 1989, 1990b). This strategy is based upon pursuing an objective outcome — much like a climber would approach a hill — only move up towards the objective outcome (hill-top). Unfortunately, as many climbers will attest, following such a sim-plistic strategy can readily result in a dead end ridge and a sub-optimal outcome. The only-move-up strategy prohibits backtracking to seek a dif-ferent path with potentially difdif-ferent outcomes for improvement, making it unlikely to consider all of the potential outcomes.
while remaining uninformed of the surrounding environment, the decision-maker is allowed to map a course ex post without regard to cost and backtrack to earlier decisions when it appears to benefit the quest for a superior outcome. When allowed to reverse any previous decision, eventu-ally all possible outcomes are considered, assuring an eventual success. The hill climber will always reach the goal outcome. This approach may be termed the revocation of outcomes, or the revo-cability principle.
To this point, it has been assumed the decision-maker can clearly identify all potential actions. In both cases collecting ex ante information could help elucidate either the likelihood of an outcome or subsequent decisions, alternatives and out-comes. A fully informed ex ante decision would require the complete understanding of all decision alternatives and their ex post outcomes: perfect prescience.
Any search approach would become more effi-cient by allowing the collection of ex ante infor-mation about the remaining outcomes. In the case of reversible hill-climbing (revocability principle), the use of ex ante information would allow for a more efficient trip to the hilltop by providing at least a rough road map allowing the decision-maker to avoid backtracking to some obvious dead-end ridges. With irreversible hill-climbing, the only means to obtain the single optimum (hilltop) with certainty is to collect all ex ante information and become fully informed about every remaining alternative and outcome, devel-oping a refined and detailed road map to the highest hill. Unlike the reversible hill-climbing approach, where actions can be revoked, the fully informed approach requires ex ante evaluation of ex post outcomes before actions are taken.
Based upon these two hill-climbing approaches, ex ante fully informed and ex post revocability, to resolve the question of potentially damaging or catastrophic outcomes, the decision-maker can view the act of collecting information in two distinctively different ways. The obvious first ap-proach is ex ante to learn incrementally all there is about the alternative actions, and when all ex post outcomes are known with certainty, then begin the process toward the desired outcome with due
deliberation. If the goal is to improve utility while avoiding a catastrophe, then an acceptable result might be any outcome that avoids the catastro-phe. With fully informed decisions, however, the decision-maker could choose the global optimum and thereby do better than simply avoiding the catastrophe.
The second approach is that of taking only actions that have revocable outcomes. If a deci-sion-maker can look at the outcomes after the fact and revoke those actions that led to catastrophic outcomes before they come to fruition, the catastrophe is avoided. While the process of revoking a decision is ex post, it singu-larly depends upon the ex ante selection of only those actions that can be reversed and outcomes revoked.
The key difference between these two ap-proaches then becomes revocability of outcomes. Within the revocability framework, the process of ex post evaluation entails a sequential movement through a series of actions, with the assurances of good record keeping and revocation to allow backtracking when needed. The pathway of ac-tions can always be reversed with a return to either a more desirable previous outcome or the avoidance of a pending catastrophe resulting from the most recent action.
2.2. A complex ecosystem
When releasing a nonindigenous species into a little understood and enormously complex ecosys-tem, outcomes are uncertain and difficult to pre-dict. One way to view these uncertain outcomes ex ante is to employ the rules of probability. To the outside observer of this complex system, the ex ante outcome set that could result from selecting actioniwould be thenarray of possible outcomes Yi,j,j=1,n, and their associated probabilitiespˆi,j
where Spˆi=1. After an action is taken by the
decision-maker, an unknown environmental mechanism selects an outcome from the outcome set. This ex post outcome is a single vector of events with probability of pi,k=1, if outcome k
2.3. Moral hazard and a principal-agent model for social optimum
The second major issue regarding the release of nonindigenous species concerns the distribution of potential losses resulting from harmful outcomes. If the releasing agent is able to capture many of the benefits while avoiding most of the costs of ‘releases that go bad,’ public harm may, in the worst cases, be widespread and large. The poten-tial for moral hazard exists when a releasing agent (whether a private agent or a public agency) is able to avoid responsibility for harmful outcomes following a release. The avoidance of negative consequences provides little incentive for releasing agents to exercise responsibility in their conduct, such as taking only revocable actions. It becomes a useful exercise to employ a principal-agent model to investigate the problem of moral hazard in the provision of revocable actions by a private agent (Pauly, 1968; Arrow, 1970). This approach permits a static analysis of marginal conditions and a review of incentive compatible behavior.2
Begin by definingUi(Y) as the decision maker’s
utility resulting from the action of selecting alter-nativeifrom anmarray of choices. Alternatively, if action k is selected, its outcome will generate utilityUk(Y). If one assumes well-behaved
prefer-ences, i.e. completeness, reflexivity, continuity, strong monotonicity, local nonsatiation and strict convexity, then the outcomes from different ac-tions can be compared and ranked ordered by preference.
Next, define the principal as a risk-neutral pub-lic agency with oversight authority concerning the release of non-indigenous species. As the decision-maker, the principal has determined that the act of species introduction is likely to be beneficial, yet could potentially lead to a damaging or catastrophic outcome for society. The principal is
benevolent and determines that a revocable deci-sion rule would be beneficial (i.e. improve ex-pected net social welfare). The principal contracts with a risk-neutral agent to provide the benefits of species introductions, but also protect society from large social losses by insisting that the agent retain the option for a socially optimal level of revocability. Furthermore, assume that the option of revoking the outcome has positive costs and that reversing a decision would result in eliminat-ing the undesirable outcome and the loss of any potential benefits that would have accrued if the action were allowed to stand. Unless the act of revocation and the foregone opportunity entailed are truly costless, it is inappropriate to treat revo-cability as a free good.
Assume an agent is considering the release of a nonindigenous species. This release can generate a private benefit X for the agent and possibly a large (yet reversible) social loss S where S\X; the probability ofS,P(S)=u. LetRbe defined as
an option to revoke the release of this nonindige-nous species. Assume that success in revoking the outcome is random with probability P(Y)=r.
Assume a cost, c(r,u), for both retaining the
option to revoke and for actually revoking an outcome. This cost will vary positively withrand
u. The first component includes expenditures and transaction costs necessary to assure the success-ful revocation of an outcome prior to a release. The second component includes expenditures and transaction costs necessary to revoke the out-come, assuming the revocation option is used. Assume the agent may earn Xindependent of the occurrence of S, and forfeitsXand avoidsSwith certainty only by both choosing to revoke the initial outcome and observing a successful revoca-tion following the occurrence of S, with probabil-ity P(X=0)=ur. The agent then observesXwith
probability P(X)=(1−u)+u−ur, which
sim-plifies to P(X)=1−ur. Furthermore, observe
that the social loss S cannot exceed the cost of certain revocability of a certain harmful outcome, or S5c(r=1,u), because certain revocability prevents S with certainty.
For the initial model, assume that both princi-pal and agent share the same benevolent desire to maximize X and avoid S by using revocability
2We acknowledge the anthropocentric stance of a
only when necessary. There is no assumption of moral hazard. Imposing the appropriate probabil-ities of revocability, social loss and private gain, the expected objective function and resulting first order condition become,
Max
wrt r
E(U)=(1 −ur)X− c(r,u)
− u(1− r)S, (1)
and
c%(r*,u) =u(S− X)\0, (2)
respectively, with second order condition,
−c¦(r*,u)B0 or c¦(r*,u)\0. (3)
The socially optimal level of revocability r* oc-curs where the marginal cost of revocability is equal to the expected net loss from the release. With positive marginal costs, revocability is not a free good.
Differentiating the first order condition with respect to u results in,
dr* du =
S− X
c¦(r*,u)\0. (4)
As the probability of damage or catastrophe in-creases, the level ofr* will likewise increase.
Moving to a comparison ofSandr*, differenti-ating the first order condition with respect to S results in,
dr* dS =
u
c¦(r*,u)\0. (5)
When the size of social damage increases, there will be increased efforts to raise the probability of revocable outcomes. Together, as u and S in-crease, r* will likewise increase to provide the socially optimal level of revocability.
Now, consider private action with moral haz-ard. To accomplish this, permit the agent to ap-propriate all of the benefitXand choose the level of revocability r˜.
Furthermore, assume that with probability u
(as before) an agenticould losesi. Initially, define
the private loss as less than the social loss of the action;siBS. From Eq. (2) and Eq. (4) when,
siBS, then r˜Br*, (6)
and when,
X\si, then r˜=0 (7)
To address the problem of moral hazard, allow the principal to assign ex post liability on releas-ing agents. Parties injured by an action are al-lowed to make claims against responsible releasing agents after the injury. Assuming zero transaction costs under litigation, wealthy agents could lose considerably more than their direct private loss si, potentially up to their current net
wealth wi. From Eq. (5), as
wiS, then r˜r*, (8)
and when
wi]S, then r˜]r*. (9)
However, for some agents net wealth may be significantly smaller than the social loss. In such cases, bad outcomes could bankrupt the agent and leave society with the loss largely uncompen-sated. The agent may feel that with little private wealth to lose, it is worth a gamble of possibly losing si for the certain benefit X. From Eq. (7),
when
X\wi+si, then r˜=0, (10)
and when
XBwi+si, then r˜\0. (11)
2.4. A principal-agent model with assurance bonding
Now consider the possibility where an agent is allowed to choose the level of revocabilityr˜, but is required to guarantee compensation B in the event the potentially large social loss S occurs, e.g. insure society against losses up to B by providing an assurance bond. The use of assur-ance bonding as a market incentive for private agents to provide an efficient level of care in their actions has seen wide application in the literature (Solow, 1971; Mill, 1972; Costanza and Perrings, 1990; Macauley et al., 1992).
Assurance bonding is imposed on the releasing agent to insure it can indemnify other agents for any losses that may accrue to them as a result of the release. To implement assurance bonding, the principal requires the releasing agent to post a bond that covers worst-case losses caused by the action. The principal could require the introduc-ing agent to post a bond to cover all perceivable costs necessary to return the host environment and affected parties to their pre-introduction status, should that be necessary. This could mean setting bonds equal to the cost of full revocability c(r=1,u), if environmental restoration is
re-quired, or the lesser of the lossS andc(r=1,u), if simple compensation of the affected parties is allowed. The firm providing the bond could be expected to use all available ex ante information about S, u and c, plus whatever is known about
the agent’s previous performance in similar enter-prises, to determine the coverage availability and collateral necessary for the bonding services.
Where information is readily available and con-sequences of actions are easily predicted, the bonding process amounts to an exercise of deter-mining the potential losses and allowing the risk market to work. With uncertain and potentially catastrophic consequences, however, a principal could play a more prominent role in the decision process. This role could extend from research and dissemination of important information, in order to improve the functioning of risk markets, to determining the amount of the bond, distributing the risk and equity within society and making the decision to permit introduction or not (Costanza
and Perrings, 1990). As these actions may entail significant transaction costs, the principal could recover this expense through one or more av-enues. For example, the principal could levy an application fee on all agents proposing an introduction.
Returning to the initial principal-agent model, redefine the principal as an oversight agency that will permit or deny the agent to introduce non-indigenous species and accumulate X the benefits of the release. The agent will provide the option of revocability R, a random variable with proba-bility rand with positive costc(r,u). The
proba-bility of a large social loss S is u. Again, S is
assumed to be significantly larger than the ex-pected value ofX. ShouldSoccur, the agent must pay the minimum of S or the assurance bond B that it provides as collateral against large losses. Furthermore, assume that the bonding agent can observe the level of revocability provided by the agent, as measured byr, and avoid the problem of moral hazard in the provision of revocability.
The contract then requires that the principal choose the level of the bond B and the profit maximizing agent then chooses the level of revo-cability r˜. As before, neither X nor S will be realized if an action is revoked. A decision to release invokes three possible outcomes for the agent:
1. Revocable damages: −c(r,u), with probabil-ity ur.
2. Irrevocable damages: X−c(r,u)−min[S,B],
with probability u(1−r).
3. No damages: X−c(r,u), with probability
(1−u).
The expected profit function for the agent becomes
Max
wrt r
E(p)=(1 −r)
u{X− c(r,u) −min[S,B]}
+ (1−u)(X−c(r,u))
+ ur[−c(r,u)], (12)
the resulting first order condition is
c%(r˜,u) =u(min[S,B]−X)\0 (13)
and the second order condition is
This establishes that the firm’s optimal level of revocabilityr˜occurs where the marginal expected cost of revocability is equal to the expected net social loss of the release if S\B or the net expected private loss after forfeiting the bond whenB\S.
As before, the static conditions establish posi-tive relationships between revocability and the probability of damaging social losses and the size of those expected losses. Differentiating c%(r˜,u)
with respect to u results in,
dr˜ du =
min[S,B] −X
c¦(r˜,u) \0. (15)
When the smaller of S or B is larger than X, which is assumed to be the case, as the probability of damage or catastrophe increases, the level ofr˜ will likewise increase.
Moving to a comparison ofS andr˜, differenti-ating c%(r˜,u) with respect to S results in,
dr˜ dS=
u
c¦(r˜,u)\0. (16)
As before, when the size ofS increases, there will be increasing efforts to provide revocability r. There are no incentives to provide revocability to cover potential damages past the level of B. To-gether, as u and min(S,B) increase, the profit
maximizing level of revocability, r˜, will likewise increase.
It is noteworthy that when the bond B equals or exceeds the social lossS, the positive first order condition becomes the same as the first model result and the agent will select the same level of revocability that is socially optimal. Or more formally,
when B]S, then c%(r*,u)=c%(r˜,u) and r*
=r˜. (17)
When an agent is required to place a bond at least as large as the worst-case social loss, he will provide the socially acceptable level of revocation and take great care in his actions. If fair insurance or bonding is available, the agent will be indiffer-ent between purchasing this insurance or self-in-suring against the loss.
If the principal permits an agent to self-insure its actions with its wealth and the worst-case
social loss is larger than this bonded wealth, a bad outcome would bankrupt the agent leaving society to cover the shortfall. This result, similar to Eq. (6), would lead to the firm under-producing revo-cability and the following holds,
BBS, then c%(r˜,u)Bc%(r*,u) and r˜Br*. (18)
The principal will need to either insist on B\S or impose r* on the agent to obtain the socially optimal level of revocability. Imposing r* will require the principal be able to observe the agent’s provision of revocation and may reintroduce moral hazard should the agent be able to hide some of its actions.
Now, consider the situation where the worst-case social loss is uninsurably large, S. The worst-case uninsured loss to society can be measured as the difference,
D=(S−B(i), (19)
where B(iis the maximum bond or insurance
cov-erage available. The size of Dcould be reason for the agency to simply deny the release; if the principal allows the release, it is assuming respon-sibility for the potential uninsurable losses on society’s behalf.
The results of Eq. (18) hold for B(iBS. A
principal permitting a release under these condi-tions will be motivated to require the agent to insure up toB(iand to impose a level of
revocabil-ity as close as feasible to the social optimum. When the releasing agent is a public servant working for a public agency, two additional sources of moral hazard come into play. First, while government (a large entity with a vast array of diverse enterprises) can self-insure — unless S
Second, the decision-makers in public agencies, the public servants, personally face relatively weak incentives to minimize social costs. With weak personal incentives, the public servant is likely to respond to pressures from private parties favoring or opposing the proposed release. In some instances, the public servant may be closely aligned with private constituency groups and value X, the private benefit resulting from the action, more than the large worst-case social loss
S.
There seems no assurance that a public agency proposing a purposeful introduction will make the socially optimal decision. This is a strong argu-ment for treating all publicly sponsored releases with the same scrutiny as those proposed by private agents. In particular, the principal may be sceptical of a public servant proposing that gov-ernment self-insure a risky release. Requiring the releasing agency purchase the socially optimal insurance or bond would encourage optimal deci-sions. As a means to fund the purchase of the bond, the releasing agency could require the pri-vate potential beneficiaries to pay via user-specific taxes or fees.
IfB(iBS, the socially responsible level of
revo-cation cannot or will not be provided, leaving society to bear the uninsured risk. It is inappro-priate to allow public servants in releasing agen-cies to undertake intolerably large risks on behalf of society. The ‘principal’ of our models should be institutionalized as an oversight agency indepen-dent not only of private agents, but also of gov-ernmental agencies desiring to release nonindigenous species.
3. Conclusion
Ecologists have long warned society to take the introduction of nonindigenous species seriously and have developed many protocols to help guide decisions concerning intentional releases. These protocols typically follow the ex ante approach to release and seek to fully elucidate the issue before proceeding. They argue against introductions un-til the full spectrum of implications are under-stood via the collection of more and better ex ante
information, with no guarantees that enough formation will ever be collected. Because this in-formation is most often costly, this seemingly endless effort to gain ever more information has proved burdensome to releasing agents with the unintended consequence of protocols being largely ignored. However, there is a second ap-proach to avoiding bad outcomes, that of allow-ing only revocable decisions. Assuming, reasonably, that marginal costs of damage avoid-ance are increasing for both approaches, ex ante full information and revocability, we propose to improve current procedures by paying a little less attention to ex ante full information and a little more to revocability.
By combining the concepts of revocable actions and incentive compatible behavior, we present an improved protocol (see Appendix A). This proto-col starts by first identifying the potentially af-fected parties and implementing Coasian liability principles when the affected parties are known and property rights clearly established (Coase, 1960). When the affected parties are large in number and/or dispersed, the protocol suggests a limited role for an independent oversight author-ity to act on the behalf of the affected party. The authority would deny permits to releasing agents that fail to post bonds sufficient to compensate for worst-case damage. One can imagine cases where there are large expected benefits from a release, but a very small chance of uninsurably large damage. The oversight authority may decide to permit a methodical step-by-step process of controlled releases, designed to make maximum feasible use of revocability and learning-by-doing. Starting with a very small revocable release in tightly controlled circumstances and with thor-ough review of the results, each subsequent step would involve larger releases, less rigid controls and a lower level of revocability. The process would be terminated as soon as the prospect of a sufficiently harmful outcome emerged and, with high probability, the harmful outcome avoided. If all goes well at each step in the process, a benefi-cial release is completed and harm avoided.
a release and more on precommitment to avoid irrevocable actions. The key difference between this alternative protocol and its predecessors is the attention it pays to revocability of outcomes. Ad-ditionally, moral hazard is avoided by the estab-lishment of an independent oversight authority to make permitting decisions and the ex ante assign-ment of liability to releasing agents.
We implement a principal-agent model to deter-mine the socially optimal level of revocability provision, the effects of moral hazard on revo-cability provided and the capacity of legal liability and assurance bonding to eliminate moral hazard. The principal-agent model generates the following contributions:
Eq. (4) and Eq. (5) demonstrate the existence of a socially optimal level of revocability, r*. When private rent-seeking agents have less to
lose from their actions than society, they will underprovide revocability Eq. (6). When the private benefit exceeds their own worst-case loss, agents will choose zero revocability Eq. (7).
When the principal (oversight authority) allows the agent to act freely, subject to ex post liability for any damage to affected parties, the following holds:
If the agent’s wealth exceeds the worst-case
social loss, the agent chooses at least the socially optimal level of revocation (Eqs. (8) and (9)).
If the agent’s wealth is less than the
worst-case social loss, bad outcomes will bankrupt the agent and leave the society to absorb the excess loss.
If the expected benefit is large, but the
agent’s wealth is small compared to the worst-case social loss, the agent may gamble for the benefit and under-insure against losses (Eqs. (10) and (11)). These results provide the rationale for imposing ex ante liability on the agent.
When ex ante permission from the principal is necessary before the release is allowed and the agent is required to post an ex ante bond to cover worst-case losses, the following applies:
When the bond is at least as large as the
worst-case loss, the agent will select the so-cially optimal level of revocability (Eq. (17)).
When the size of the worst-case loss exceeds
the bond, the agent under-produces revo-cability and the principal can choose to deny permission to release, or to permit the re-lease, impose the highest feasible (but neces-sarily socially suboptimal) level of revocability (Eq. (18)) and absorb the risk of uninsured excess loss D, on behalf of the public.
Releases planned by public servants working for governmental agencies should be treated no differently than those planned by private agents. An independent oversight authority (the principal) should require all parties, public and/or private, proposing the release of non-indigenous species to post bonds and imple-ment the maximum feasible level of revocability if the largest bond obtainable falls short of the worst-case social loss.
Finally, implementing a decision-making frame-work that attends to both ex ante information and revocability of bad outcomes, a new protocol can be established that would prohibit or greatly reduce the likelihood of catastrophic releases. This new protocol is presented in the following appendix.
Acknowledgements
This research was funded in part by the Ohio Sea Grant College Program (project R/ZM-14) from the National Oceanic and Atmospheric Ad-ministration (NOAA grant NA90AA-D-SG496), US Department of Commerce.
Appendix A. A decision protocol based on revocable actions
review of the possible outcome set, in particular the size and probability of loss, and number and identity of affected agents.
A.1. Stage I: Initial ex ante re6iew of effects and affected parties
A.1.1. Step1: Does a large social loss exist in the outcome set?
The OA will require the agent to perform an initial ex ante review of the nonindigenous species using all available literature, expert opinion and simulation. This study will determine the potential size and scope of loss. The public will be allowed to review and comment on the agent’s initial findings. The OA, using a panel of technical ex-perts, will determine the facts of the review. If there is no potential of loss in the outcome set, then the release is permitted unconditionally. If the possibility of harmful outcomes exists, the OA moves to the second step.
A.1.2. Step2: Identify parties affected by release With the existence of harmful outcomes iden-tified, the OA next requires the agent to determine the number and identity of the adversely affected parties. If there are only a few easily identifiable affected agents, move to step three, which in-volves private contracts between releasing and potentially affected parties.
When the potentially affected parties are un-known or large in number, optimal private con-tracts among acting and affected parties are more problematic. With numerous and/or unknown af-fected agents, proceed to the first step of Stage II in the protocol.
A.1.3. Step3: Affected parties are few and known
With few and well identified affected parties, the agent notifies them of the pending release and reports this notification to the OA. The OA an-nounces it will permit the release only with the unanimous consent from all parties listed. This allows the affected parties to enter into private contracts with the agent wishing to release the nonindigenous species. With clear beneficiaries, risk-bearers and property rights, the individual
parties will work out an efficient outcome. Ac-cording to Coase (1960), with private benefits and risks and unattenuated property rights, markets will efficiently minimize net social costs.
Furthermore, it is reasonable to assume that the affected agents are motivated to learn ex ante their own potential losssj, for alljaffected parties
and require the agent to insure with their own individual bond, Bj]sj. With this requirement,
according to Eq. (17), the agent will take due care and follow the optimal level of revocability. When the agent can prove to the OA that all affected parties have agreed to the release, the OA permits the agent to proceed with the introduction; other-wise the release is denied.
In this Coasian solution, the OA may provide independent research and information concerning the nature and extent of ex ante losses, but Coasian bargains are based on the affected parties’ estimates of ex ante losses.
A.2. Stage II: Insure against worst-case social loss
If Stage I results in a positive probability of a social loss and the potentially affected parties are many and/or difficult to identify ex ante, the OA should implement ex ante liability by requiring as a condition for granting a release permit that the agent post an assurance bond at least as great as the worst-case social loss. To make informed deci-sions on the size of assurance bonds, the OA will be interested in gaining additional information on the size of the worst-case social loss, S and the revocability cost function, c(r,u).
A.2.1. Step 1:Ex ante refinement of worst-case social loss and re6ocability
put, the task is to see how much useful informa-tion exists and to size up the situainforma-tion.
When information is scarce and conclusions vague, the OA will want to err on the conserva-tive side. While the costs and burden of research should be the responsibility of the releasing agent, the OA could serve as an independent provider of initial information to help set limits for perfor-mance bonds developed in the proceeding step. As always the OA serves also as reviewer and ulti-mate judge of the credibility of the information gathered and conclusions drawn by the agent.
A.2.2. Step2: Co6erage of worst-case social loss Using the refined estimate of the worst-case social loss and c(r,u) from Step 1, the OA re-quires the releasing agent to insure against this social loss before allowing the release. The most direct method is to require the agent to post an assurance bond. To avoid the problem of moral hazard, assume the bondsman is able to observe the level of revocability attained by the agent. Then the bondsman sets fees conditional onS, u
and the level of revocability r. The agent opti-mizes by minimizing own-costs (the cost of revo-cability plus the bonding fee), thus increasing the expected net benefit resulting from the release, and protecting the bondsman by assuring that risk markets reflect true potential losses.
The OA determines S and the cost of full revocability (equivalent to reversing the social loss) and requires the agent to insure or post a bond up to this amount, such that B]
min[S,c(r=1,u)]. Earlier it was shown that when B]S, the agent will provide the socially optimal level of revocabilityr*. With the worst-case social loss thus insured, the OA can permit the introduc-tion. If the releasing agent cannot meet this condi-tion but nevertheless desires to proceed with the release, the agent is asking society to bear an uninsured potential loss. Proceed to the next stage.
A.3. Stage III:Conditions for release with uninsured potential loss
When worst-case social loss is larger than the agent’s ability to bond against its occurrence, the
OA may then choose between denying the release or permitting it conditionally. If the agent is allowed to proceed unconditionally, Eq. (18) shows that the agent will not exercise due caution and under-provide the level of revocation.
A.3.1. Step 1:Gathering additional resources for insurance
One case in which the OA may consider permit-ting a release when the agent is unable to post the bond against the worst-case social loss, arises when other private agents agree to assume the uninsured portion of liability. When this occurs, the result reverts toB\Sand the expanded agent group should be allowed to release as before in Stage II, Step 2; otherwise move to the next step.
A.3.2. Step 2:Expected benefit much larger than expected loss
The OA may be tempted to permit a release with an uninsurable worst-case loss if the expected benefit of the release dwarfs the expected social loss, or E(X)E(S). (Note that to determine E(S), the OA needs to know both S and u; in
Stage II, to determine the size of the bond, the OA needs only to know S; the bonding firm, however, needs to know Sandu). However, even
with large expected benefits, when the size of the worst-case loss from taking action iis potentially large enough to place a major burden on society, UiBUmin, the OA will be motivated to take a
risk-averse stance. If the agent can convince the OA that the expected net benefit is too large to dismiss, the OA will likely still demand a careful application of revocability. Otherwise, society could be left with the large social loss, as demon-strated by the positive static condition of Eq. (16). To justify proceeding, the expected benefits of the release would need to outweigh any expected loss by a large margin. A simple benefit-cost criterion where a proposal is accepted if expected net present value is positive would be inappropri-ate, given the potential for large uninsured social costs. An appropriate criterion may be that ex-pected benefits exceed exex-pected losses by at least an order-of-magnitude.
A.3.3. Step3: Stepwise release:experiments with re6ocation
Even with disproportionately large expected benefits, the large worst-case social loss dictates that extreme care must be taken before proceed-ing with an uncontrolled release.
This extreme care should be in the form of a stepwise or experimental revocation. Here the ac-tion of release reverts to a process of many small steps or controlled experimental releases, with diminishing degrees of revocability or increasing c(r,u) before ending with the eventual
uncon-trolled release. This permits the conuncon-trolled process to be stopped, and its bad outcome revoked, with decreasing probability over the sequence of steps or experiments, allowing for more deliberation by the OA and the agent. Furthermore, this stepwise process will serve as a learning experience for both the OA and the agent. By keeping each step small with initial steps fully revocable, new infor-mation onS,uandc(r,u) can be gained to allow
for more informed steps or experiments in the future.
A.4. An example stepwise release
The procedure starts with an agent requesting a permit for the first step in the stepwise process. This step, and all subsequent steps, must be per-mitted by the OA, or the release is terminated.
A typical step in this procedure will start with feasibility studies performed by the agent to gain estimates ofS,u andc(r,u). The studies are then
presented for public review and comment and OA determination of fact. Following the review and comments, the OA sets a bond that equals or exceeds the estimated worst-case loss resulting from this step, B]S.. Note that the agent will consider the potential benefits from the whole step-wise release process when deciding whether to post the bond for the next step, but the OA will set the level of the bond considering only the worst-case damage from this particular step. A stepwise release program thus enhances insurabil-ity because the relevant damage to insure is only the damage from the next step.
If the agent agrees to post the bond, the OA permits the specified step. Following the release,
the OA requires the agent to fully report the outcome of this specific experimental release. This report is open to public comment and review and OA determination of fact. If the report is favor-able for continued stepwise release, the process moves to the next step. The post-release studies of the just-completed step will provide basic infor-mation for the feasibility study for the next step. The interest in revocation within the stepwise process will allow the research effort by the agent to narrow in scope. Emphasis will focus on infor-mation useful to eliminating the species from the proposed host ecosystem, estimates of r and its associated cost function c(r,u). New research
should be directed into exploring effective meth-ods for controlling and/or eradicating the species. It is important to develop procedures that allow for the carefully controlled experimental releases in the early steps. For example, early research might focus on the development of completely effective physical barriers and/or eradication tech-niques. Early steps might use sterile release stock with its minimal cost of revocation. For later steps or an uncontrolled release, simply using sterile release stock would prevent a complete evaluation of the species’ true effect on the new ecosystem. At some point, the ability of the spe-cies to spread within the new ecosystem must be evaluated. More complete revocation efforts might look at developing ‘genetic bombs’ that could be used to allow eradication of a successful but harmful released species.
As the steps progress, the information the OA gains onc(r,u) anduwill allow it to continuously
adjust the size of the necessary performance bond for each experimental step. With the social loss insured at each step, the agent will revert to the socially optimal level of revocability. It is possible that the information gathered in sequential re-lease-steps may lead to the estimate ofubecoming
closer to 0 or 1, making release approval or denial less problematic. A more likely outcome is in-creased information on the process of revocability (control and removal of the species). This could lead the agent to a control program with afford-able cost c(r=1,u), even significantly less than
Nevertheless, a different scenario could result. The subsequent experimental steps may involve increasing c(r,u) as the species’ release is less controlled. Here the cost of revocation could eventually become boundless with a complete and uncontrolled release. At some step in the process the agent will reach the point where the social loss exceeds the agent’s ability to insure the experi-mental release. When S\B, again, there is an uninsured social loss. The OA must make the decision to either allow the final uncontrolled release, or stop the process and deny the release. If the OA gambles and allows the release, this would imply that the socially optimal level of revocation is less than certainty and the OA makes the final determination to take the chance of S in order to enjoy the large expected benefit E(X).
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