Risk Management in Border Inspection

As part of their commitments under the World Trade Organization's Agreement on TradeFacilitation, many developing countries are set to adopt risk management, a strategy for selecting import shipmentsfor inspection. This paper formalizes key enforcement issues related to risk management. It argues that the complexitiesof international trade oversight mean that inspecting agencies lack certainty about the conditional probabilitythat a given shipment will not comply with import regulations. Ambiguity of this sort is likely to beimportant in developing countries that lack the sophisticated information technology (IT) used in advancedrisk management systems. This paper show empirically that infrequent shipments have conditionally higher inspectionrates, a finding that is consistent with the ambiguity hypothesis. This paper formalizes a role for ambiguity in atheoretical model of border inspection. Finally, the paper calibrates the model and shock the ambiguity parameters toillustrate the consequences of an IT -driven improvement in risk management capabilities for search and compliance.