Modeling Regional Externalities with Heterogeneous Incentives and Fixed Boundaries: Applications to Foot and Mouth Disease Control in South America*

Abstract

F or over a century, the countries of South America's Southern Cone1 have struggled to control or eradicate foot and mouth disease (FMD). These efforts have been undermined by a pronounced spatial spillover of the FMD virus. Because the virus spreads readily, the effectiveness of control efforts in one country, or on one ranch, is influenced by control efforts in nearby countries or ranches. These spatial effects are compounded by variations in incentives to control the disease and diverse sensitivities to neighbors. This paper demonstrates how control behavior is affected by spatial spillovers of varied intensity and by heterogeneous incentives to control disease. The decision to control disease is framed as a spatial game in which the behavior of neighbors influences the payoffs to individuals from control effort. Because trade, geographic, and policy factors can leave some individuals more susceptible to their neighbors' actions than others, we impose hard boundaries that constrain disease spread and modulate the intensity of spillovers. Divergent incentives to control disease are modeled by fixing some individuals in specific