A contingent plan for disaster response

Natural and man-made disasters imply a great deal of uncertainty in terms of potential damage, though it is certain that there would be a huge spike in the demand for relief supplies causing shortages and/or delays in providing aid. Ruptures in the infrastructure (roads, utility, and communication lines) cause additional delays due to repairs. Therefore, the relief providers need to work in collaboration with retailers, and infrastructure service providers for improving responsiveness. The relief providers (government and non government) rely on acquiring and delivering supplies in real time because such actions accompany little risk of resource underutilization, though the cost of real time acquisitions can be high. In contrast, a proactive response, while minimizing acquisition cost, can be very ineffective if demand surges are high. We study a hybrid of reactive and proactive approaches, where the reactive response is contingent upon the disaster intensity exceeding a certain threshold. We show how the threshold value may impact capacity acquisitions and prices and establish the optimality of contingent response. Further, we establish how an infrastructure contract may help reducing the social cost of disaster. (C) 2011 Elsevier B.V. All rights reserved.