Dynamic investment in disaster preparedness under recurrent and catastrophic risks

Abstract

Long-term disaster risk reduction (DRR) requires investment decisions that account for uncertain disaster conditions and accumulated preparedness capacity. This study develops a novel stochastic dynamic control model for optimal DRR investment under recurrent and catastrophic uncertainty. The model combines diffusion and Poisson jump processes and treats preparedness capital as an endogenous stock that accumulates through investment, depreciates, and mitigates economic damage. We derive a state-dependent investment rule from the Hamilton-Jacobi-Bellman equation to minimize expected discounted investment expenditure and disaster damage over an infinite horizon. Monte Carlo policy comparisons and numerical experiments examine how disaster risk structures interact with investment decisions to shape preparedness accumulation and economic losses. The results show that the economic value of DRR investment depends on adjustment to evolving conditions and disaster loss mechanisms. Lower expenditure can coexist with greater preparedness, while similar expected losses can conceal different upper-tail risks. Effective investment therefore requires attention to both accumulated preparedness and the structure of disaster risk. These findings support long-term DRR planning that integrates investment timing, capital maintenance, and recovery conditions with residual loss assessment. Upper-tail indicators complement expected-loss evaluation without being directly optimized. The framework provides a basis for dynamically managing preparedness capital.