An Experimental Investigation of Resilience Decision-Making in Repeated Disasters

Abstract

Given the growing prevalence of catastrophic events and health epidemics, policymakers are increasingly searching for effective strategies to encourage firms to invest in resilience rather than relying on insurance or government assistance. Too often, however, resilience research focuses on decisions made by firms and emergency planners in the context of “one-off” events. We extend this research by examining resilience decision making in the more realistic context of repeated catastrophic events. Using a population of professional managers of middle market firms and a university experimental economics subject pool, we conduct a series of controlled experiments on the decision to invest in inventories to improve firm resilience to repeated catastrophic events. While existing economic and supply chain resilience research has focused on resilience in terms of avoiding some magnitude of economic losses, existing research omits a focus on the probability of those losses. Controlled experiments can evaluate the influence of probability more effectively than observational data by better controlling for magnitude and more easily accounting for repeated events. We find that decision makers are less likely to make resilience investments when a disaster has recently occurred. We further find that advisory information alone is insufficient to motivate resilience investments by firms. It must be substantiated by a history of advisory accuracy. However, we find that this effect is heavily moderated by the type of advisory information provided; we find that firms are much more likely to trust precautionary advice.

Keywords: Resilience; Experimental Economics; Inventories; Natural Hazards; Emergency Management; Middle Market

JEL Classification: C92; D25; E22; G31; H54; Q54