Disaster Risk Decision: A Dynamic Computable General Equilibrium Analysis of Regional Mitigation Investment

For implementation of specific actions to reduce risks, there is lack of a unified tool to compare different mitigation investment strategies and to prioritize alternative mitigation measures. Organizations usually address some operational risks such as business interruption (BI) losses. Computable general equilibrium (CGE) models are state-of-the-art economic tools to account for BI losses. This study proposed a new, improved dynamic CGE model to analyze and compare mitigation investment measures that aim at reducing BI losses. The new model, a time-recursive dynamic model reflecting the recovery and reconstruction period, connects reconstruction investment with reconstruction funds source, such as from government, household, enterprise, or outside a disaster-affected area. The 2008 Wenchuan earthquake in China was selected as a case study to illustrate the new model. Some interesting topics about mitigation investment were analyzed: (1) the relative importance of pre-disaster reduction investment versus post-disaster reconstruction investment; (2) post-disaster economic recovery with the contribution of insurance compensation; (3) the optimal ratio between mitigation funds collected from the disaster-affected area and that collected from outside the disaster-affected area; (4) the rational division of limited mitigation funds to each year during the restoration and reconstruction period.