A target-based model of efficient allocation of federal resources to the states for emergency preparedness

Abstract

In the wake of the September 11, 2001, terrorist attacks, Congress provided a fund to help states offset costs for protecting against terrorist attacks and for emergency preparedness. More than one-third of this money is shared equally by all states, with the rest distributed based on the states’ population share, regardless of the potential targets in each state. This paper develops a rational public finance framework for distributing money to states for protecting against terrorist attacks. We propose two allocation criteria: (1) an efficiency criterion that equalizes the marginal expected loss (human and monetary) across all targets and (2) an equity criterion that adjusts payments to states based on their ability to pay for their own protection. These criteria imply a much more concentrated distribution of protection spending in a few highly populated, target-rich states than is now the case. We then explore the additional information required to protect against all types of terrorists. Limiting the set of protected targets to a few that are highly valued by well-funded terrorist groups produces an even more geographically concentrated funding portfolio. Terrorist insurance is preferable for low-likelihood, difficult-to-protect targets, or targets attractive to individual terrorists.