This report aims to help designers of victim compensation programs make decisions that balance fairness to victims, speed of compensation, and size of transaction costs. It does so by highlighting major issues that designers are likely to confront, considering multiple outcomes of design decisions, and recognizing conflicts or trade-offs in pursuing fairness without undue delay or excessive transaction costs.

Designing Compensation Programs for Individuals and Households After Man-Made and Natural Disasters in the United States

Steven Garber

ResearchPublished Jul 6, 2016

Man-made and natural disasters (such as mass shootings, terrorist attacks, flooding, and hurricanes) occur fairly frequently in the United States. Much less frequently, after a disaster occurs, ad hoc victim compensation programs (VCPs) are instituted using public or private funds. The designs of such VCPs — specifying who is eligible for compensation, how much compensation each person receives, procedures for claiming funds and auditing the program, and so on — have differed across programs and often engender considerable controversy. Those responsible for designing these programs must balance competing outcomes and fulfill obligations to various stakeholders, such as victims, taxpayers, and donors. The objective of this report is to help VCP designers make decisions that balance fairness to victims, speed of compensation, and size of transaction costs. It does so by considering design choices in four public VCPs created since 2001 and seven private VCPs created since 2007, highlighting major issues that designers are likely to confront, considering multiple outcomes of design decisions (for example, fairness), and recognizing conflicts or trade-offs in balancing such outcomes. The report offers practical suggestions for how VCP designers can achieve their goals fairly, quickly, and efficiently.

Key Findings

VCP Designers Must Consider Many Factors and Competing Outcomes

  • It is helpful to view VCP designs as encompassing rules, processes, and principles of program governance.
  • The three primary goals of designers of recent VCPs are overall fairness to victims, timely compensation, and low transaction costs.
  • The designs of VCPs affect how well outcomes of compensation programs serve these goals.
  • There are conflicts or trade-offs in jointly pursuing the three outcomes. For example, improving fairness by using more-precise surrogates for need, deservingness, and horizontal equity will often reduce speed of compensation, increase transaction costs, or both.
  • Fairness is the most challenging goal that VCP designers pursue. Assessing fairness requires value judgments that differ substantially among reasonable, well-meaning participants in VCPs, as well as onlookers and commentators.
  • When it comes to fairness, recent VCPs have emphasized victims' need for compensation, victims' deservingness of compensation given their actions, and horizontal equity (treating similar victims alike).
  • Besides ensuring that a program's design is fair to victims, VCP designers also should consider whether it is fair to some nonvictims. For example, fraud by VCP claimants undermines fairness to the taxpayers or donors who provide funds.

Recommendations

  • Focus on the well-being of the victims of the disaster and on meeting obligations to funders and upstream VCP creators (if any) who delegate decisions to the designer. For example, do not be concerned with the potential effects of decisions on future rates of insurance uptake or self-protection efforts.
  • Recognize that eligibility decisions — which may often precede many other design decisions — are crucial. For this reason, think especially hard about eligibility rules.
  • Be aware that assigning equal payments for all fatalities seems less controversial than offering unequal payments because many object on moral grounds to the idea that some lives are more valuable than others.
  • To save on administrative costs, make sure that program rules and processes are no more complex than needed to accommodate the other goals. For example, consider carefully whether an arguably unfair rule would undermine fairness enough to warrant the resulting extra administrative costs.
  • Try to avoid using donations that were solicited by invoking sympathy for the direct victims of the disaster to help other groups, such as community members at large; such use of funds has greatly annoyed many of those eligible for compensation from a VCP.
  • Try to limit the number of funds or programs providing compensation to victims — ideally, to only one. Efforts to coordinate among several compensators may well be futile, and they will likely undermine fairness of compensation, increase payment delays, and increase administrative costs. Thus, preempting the creation of multiple funds or programs seems more promising than effectively coordinating among them.

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Garber, Steven, Designing Compensation Programs for Individuals and Households After Man-Made and Natural Disasters in the United States. Santa Monica, CA: RAND Corporation, 2016. https://www.rand.org/pubs/research_reports/RR1005.html.
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