Propagation of disaster shocks through supply-chain networks under incomplete information

Wang, D. (2020). Propagation of disaster shocks through supply-chain networks under incomplete information. IIASA YSSP Report. Laxenburg, Austria: IIASA

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Abstract

Increasingly complex linkages of the global economy can be a channel for the propagation of negative climate-related shocks with the potential to deteriorate resilience and sustainability in societies. Given projected increases in disaster risks due to climate change, developing models that more accurately simulate the propagation of shocks through economic networks becomes crucial for designing effective prevention and recovery strategies. This study focuses on the short-term decision-making process of economic agents in disaster aftermath and its implications for the propagation of disaster shocks. We develop a new recursive dynamic model, in which a key feature of economic agents’ behavior in disaster aftermath, making decisions with incomplete information, is introduced. We apply the model to study the propagation of economic impacts induced by stylized disasters and find that it can reproduce the theoretically expected decision-making process of economic agents under incomplete information in a rapidly changing economic environment. Besides the disruption of intermediate materials supply, it captures another important channel that causes indirect losses, i.e., the lack of information. On top of a more comprehensive risk assessment, the proposed approach provides a modeling framework for analyzing the relation between information and disaster propagation.

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