Dynamic effects of a foot-and-mouth disease outbreak: introducing farm bankruptcy risk

In FMD free countries, the occurrence of a FMD outbreak is a rare event with potentially large economic losses. In this paper we explore the dynamic effects of a FMD outbreak taking into account the largely neglected issue of farm bankruptcy. We find complex dynamic effects when the farm credit market suffers from information imperfections leading to farm closure. Welfare effects are also dramatically altered when these farm credit imperfections are acknowledged. Domestic consumers loose in the long run from a FMD outbreak because domestic supply contracts. Finally we show the crucial role of price expectations in presence of a potentially catastrophic risk