Guilt by Association: Strategic Failure Prevention and Recovery Capacity Investments

Sang-Hyun Kim () and Brian Tomlin ()
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Sang-Hyun Kim: Yale School of Management, Yale University, New Haven, Connecticut 06511
Brian Tomlin: Tuck School of Business at Dartmouth, Hanover, New Hampshire 03755

Management Science, 2013, vol. 59, issue 7, 1631-1649

Abstract: We examine technological systems that display the following characteristics: (i) unplanned outages incur significant costs, (ii) the system experiences an outage if one or more of its subsystems fails, (iii) subsystem failures may occur simultaneously, and (iv) subsystem recovery requires specific resources and capabilities that are provided by different firms. Firms may invest in two measures to enhance system availability---namely, failure prevention and recovery capacity. If recovery capacity investment is the only option, we find that the firms in a decentralized setting overinvest in capacity, resulting in higher system availability but at a higher cost. If both investments can be made, we find that the firms underinvest in failure prevention and overinvest in recovery capacity. That is, firms in a decentralized setting shift their focus from preventing failures to responding to failures. The net effect is lower system availability, reversing the conclusion above. We also find that, unexpectedly, firms are more willing to let their subsystems fail if a joint failure is more likely to occur. This paper was accepted by Martin Lariviere, operations management.

Keywords: supply chain disruption; business continuity; system reliability; game theory (search for similar items in EconPapers)
Date: 2013
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Citations: View citations in EconPapers (22)

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