Resilience Decisions of the Firm: An Experimental Analysis of Dynamic Decision-Making in Repeated Disasters
44 Pages Posted: 9 Mar 2018 Last revised: 12 Jul 2019
Date Written: July 10, 2019
Given the increasing prevalence of catastrophic events, 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. Evaluating the influence of probability cannot be as effectively evaluated with observational data that cannot control for magnitude in the way a controlled experiment can. We find that decision makers are less likely to make resilience investments in inventories 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
Suggested Citation: Suggested Citation