Assessment of the Regional Economic Impacts of Catastrophic Events: CGE Analysis of Resource Loss and Behavioral Effects of an RDD Attack Scenario

Abstract

We investigate the regional economic consequences of a hypothetical catastrophic event-attack via radiological dispersal device (RDD)-centered on the downtown Los Angeles area. We distinguish two routes via which such an event might affect regional economic activity: (i) reduction in effective resource supply (the resource loss effect) and (ii) shifts in the perceptions of economic agents (the behavioral effect). The resource loss effect relates to the physical destructiveness of the event, while the behavioral effect relates to changes in fear and risk perception. Both affect the size of the regional economy. RDD detonation causes little capital damage and few casualties, but generates substantial short-run resource loss via business interruption. Changes in fear and risk perception increase the supply cost of resources to the affected region, while simultaneously reducing demand for goods produced in the region. We use results from a nationwide survey, tailored to our RDD scenario, to inform our model values for behavioral effects. Survey results, supplemented by findings from previous research on stigmatized asset values, suggest that in the region affected by the RDD, households may require higher wages, investors may require higher returns, and customers may require price discounts. We show that because behavioral effects may have lingering long-term deleterious impacts on both the supply-cost of resources to a region and willingness to pay for regional output, they can generate changes in regional gross domestic product (GDP) much greater than those generated by resource loss effects. Implications for policies that have the potential to mitigate these effects are discussed.

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