The cost-effectiveness of economic resilience

• Published in: International journal of production economics 2022-02, Vol.244, p.108371, Article 108371
• Main Authors: Dormady, Noah C., Rose, Adam, Roa-Henriquez, Alfredo, Morin, C. Blain
• Format: Article
• Language: English
• Subjects: Economic resilience; Natural hazards economics; Production and operations management; Production theory; Small and medium-sized enterprises; Survey research
• ISSN: 0925-5273; 1873-7579
• DOI: 10.1016/j.ijpe.2021.108371

Society is increasingly focused on resilience to catastrophic events. Firms generally observe two forms of economic disruption, property damage and business interruption (BI). In contrast to pre-event mitigation intended primarily to avoid property damage, firms can use a variety of resilience tactics once the disaster strikes to reduce BI losses by improving stability and continuity of operations. This paper makes a theoretical contribution by incorporating resilience into longstanding economic production theory and by identifying the key components for evaluating the cost and effectiveness of resilience. It also makes important empirical contributions by designing, administering, and analyzing surveys of firms affected by two of the most devastating disasters in US history. This paper is the first to econometrically analyze these production theory relationships, identifying the cost-effectiveness of a full range of explicit resilience tactics. Results show that BI losses exceeded property damage losses by over 900% and, on average, firms avoided $4.57 in BI for every dollar spent on resilience. Generalizable comparative static estimates are presented for the manufacturing sector to test formalized relationships, which identify that tactics capable of improving factor productivity can significantly enhance the cost-effectiveness of resilience.