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HAZARD COMPENSATION AND INCENTIVE SYSTEMS: AN ECONOMIC 160 PERSPECTIVE original typesetting files. Page breaks are true to the original; line lengths, word breaks, heading styles, and other typesetting-specific formatting, however, cannot be About this PDF file: This new digital representation of the original work has been recomposed from XML files created from the original paper book, not from the retained, and some typographic errors may have been accidentally inserted. Please use the print version of this publication as the authoritative version for attribution. lowest bids. On equity grounds this is disturbing. There are two ways to alleviate this problem. The communities that would be potential sites could be restricted to areas where there are relatively few hazardous facilities. An alternative approach is to couple this auction procedure with a lottery in which each candidate has an equal chance of being chosen as a site. Kasperson (in this volume) points out that lotteries are frequently used when fairness of selection becomes an overriding requirement, as in the military draft. In the procedure proposed by Kunreuther et al. (1985), communities that are not selected by the lottery still have an opportunity to enter a lower bid than that specified by the one randomly chosen. In this way they can "demand" that they be chosen as the site. Otherwise they would pay 1/(n-1) of their initial bid. The Massachusetts Siting Hazardous Facility Waste Act of 1980 reminds us of the importance of integrating compensation and insurance policies into a broader framework. More specifically there is a need at the outset to examine all of the potential sites from both an environmental and an economic perspective, eliminating any that do not meet specific health and safety criteria or that may be inefficient with respect to the transportation of wastes from industries in the region. Following this step, one must gain an understanding of the values of the interested parties by determining the costs and benefits they perceive at each site. At this point conflicts between the stakeholders will be uncovered and specific benefits and risk-sharing arrangements, such as compensation and insurance, can be explored. Standards for design and operation of a facility can be stipulated through appropriate monitoring and control procedures by a governmental agency. CONCLUSIONS We have examined the features associated with societal problems involving risk and the cognitive limitations of individuals in collecting and processing information related to low-probability, high-consequence events. Incentive systems and compensation mechanisms may be useful policy tools for encouraging the adoption of efficient protective activities as well as for improving the siting process for new technologies. In particular, by introducing compensation as an option, the public may begin to evaluate its "willingness to pay" to avoid a net risk in relation to its "willingness to accept" a given net risk. The design and implementation of incentive and compensation programs raise a number of questions regarding the appropriate form, timing, and magnitude of these payments. The following issues are important in this regard:
