The Cost-Effectiveness of Economic Resilience

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 U.S. 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 tactics capable of improving factor productivity can significantly enhance the cost-effectiveness of resilience.

Dormady, N., Rose, A., Roa-Henriquez, A., & Morin, B. (Forthcoming). The Cost-Effectiveness of Economic Resilience. International Journal of Production Economics, xx(x): pp-ppp.