Risk management in border inspection

Abstract

As part of their commitments under the WTO’s Agreement on Trade Facilitation, many developing countries will adopt risk management, a strategy for selecting import shipments for inspection. In this paper we formalize key enforcement issues related to risk management. We argue that the complexities of international trade oversight mean that inspecting agencies lack certainty about the conditional probability that a given shipment will comply with import regulations. Ambiguity of this sort is likely to be important in developing countries that lack the sophisticated information technology (IT) used in advanced risk management. We show empirically that infrequent shipments have conditionally higher inspection rates, a finding that is consistent with our ambiguity hypothesis. We formalize a role for ambiguity in a theoretical model of border inspection. We calibrate the model and shock the ambiguity parameters to illustrate the consequences of an IT-driven improvement in risk management capabilities for search and compliance.