Association for Public Policy Analysis & Management

As the prevalence, severity, and assets at risk to disasters continue to increase, it is becoming increasingly important for communities to enhance resilience to such disasters. An important but understudied aspect of such resilience is the collective decisions that decision makers within businesses make to prepare for and recover from severe disruptions. Such decisions, however, are not made in isolation, and the government has the ability to influence those decisions through the provision of information and/or recommendations.

This paper examines how a diverse set of decision makers process advisory information about resilience in the presence of repeated disasters over time with the goal of providing recommendations on how to best engage those decision makers. Significant gaps in understanding exist in both theory and practice regarding how decision makers conceptualize investments that reduce risk, such as investments in inventories and insurance. When firms make these expenditures, they often do not fully account for the range of interruptions that can occur and often mistakenly over-prioritize losses due to property damage relative to losses due to business interruption.

The paper utilizes data from a series of controlled experiments on the decision of firms to invest in resilience to avoid supply chain disruptions. Experimental subjects consist of both actual business managers and students from a university experimental economics subject pool. We employ dynamic econometric models of repeated measures and utilize qualitative insights from a post-experiment survey of subjects designed to elicit subject-level rationales for investment decisions that are integrated into the econometric analyses.

In the experiment, the subjects make an initial investment recommendation regarding investing in inventories, a well-established economic resilience tactic. The decision to invest carries an immediate cost to avoid potential business interruption. Depending on the treatment, subjects then either receive advice from a gendered advisory group to “invest” or “not invest,” receive information about the probability of the disruption occurring, or are provided an opportunity to purchase consulting information about that probability. The subjects then have the opportunity to change their recommendation. Qualitative variables explain how subjects perceived the inventories, how they processed the advisory information, and how they conceptualized the nature of the disruption.

Our analyses suggest that of the decision makers who changed their resilience investment decision, advisory recommendations to invest in resilience were seven times more compelling than advisory recommendations to not invest. By digging more deeply into their determinants through our qualitative measures, we gain new insights that inform important policy decisions at the state, local and federal levels for organizations such as DHS and FEMA, and other emergency management agencies. By better understanding how firms are conceptualizing their need for taking proactive resilience actions, and by understanding how these firms conceptualize the nature of the threats they face, this research can play an important role in helping to inform engagement with the small and mid-sized businesses that make up the bulk of the US economy.