November 21, 2018
Large-scale electricity outages have the potential to result in substantial business interruption losses. These losses can be reduced through a number of tactics within the broader strategies of mitigation and resilience. This paper presents a methodology for analyzing the tradeoffs between mitigation and three categories of resilience. We derive optimality conditions for various combinations of strategies for a Cobb-Douglas damage function and then explore implications of a less restrictive Constant Elasticity of Substitution damage function. We also calibrate the model and perform Monte Carlo simulations to test the sensitivity of the results with respect to changes in major parameters. Simulation results highlight the possibility that substitution away from mitigation towards resilience may lower total expected costs from large-scale outages for a given level of risk reduction expenditure when the marginal benefit of resilience is high relative to the expected marginal benefit of mitigation.