TY - JOUR

T1 - Optimal Regulation of the Construction of Reliable Sea Defenses

AU - Nieto-Cerezo, Oscar

AU - Wenzelburger, Jan

AU - Patelli, Edoardo

AU - Beer, Michael

N1 - Funding information: This work was supported by the Engineering and Physical Sciences Research Council [Award No. 1566992]. The authors thank Hans Corsten, Dominique Demougin, Sven O. Krumke, and Philipp Weinschenk for many important discussions and thank the two anonymous referees for invaluable comments.

PY - 2020/6

Y1 - 2020/6

N2 - This article studies incentives to share risk as a risk management tool to address issues of interdependency among risk assessment, risk perception, and risk management in large civil engineering projects. The decision problem of an operator in charge of constructing reliable sea defenses is studied, and it is shown that operators have no incentive to reduce the likelihood of rare but extreme floods because their liability for damage costs cannot exceed the value of their private assets. An evaluation is made of the level of liability that induces cost-effective safety measures to reduce the probability of extreme events without bankrupting the operator, and its impact on the welfare of society is studied. It turns out that society will be better protected at a significantly lower cost when tacitly retaining the residual risk of extreme damage costs. The findings offer an explanation as to why stakeholders tend to ignore the potential costly consequences entailed by the failure of civil engineering projects. Although these catastrophic failures are rare, this paper contends that society, as a whole, should bear the residual risk of such events.

AB - This article studies incentives to share risk as a risk management tool to address issues of interdependency among risk assessment, risk perception, and risk management in large civil engineering projects. The decision problem of an operator in charge of constructing reliable sea defenses is studied, and it is shown that operators have no incentive to reduce the likelihood of rare but extreme floods because their liability for damage costs cannot exceed the value of their private assets. An evaluation is made of the level of liability that induces cost-effective safety measures to reduce the probability of extreme events without bankrupting the operator, and its impact on the welfare of society is studied. It turns out that society will be better protected at a significantly lower cost when tacitly retaining the residual risk of extreme damage costs. The findings offer an explanation as to why stakeholders tend to ignore the potential costly consequences entailed by the failure of civil engineering projects. Although these catastrophic failures are rare, this paper contends that society, as a whole, should bear the residual risk of such events.

UR - http://www.scopus.com/inward/record.url?scp=85083202875&partnerID=8YFLogxK

U2 - 10.1061/AJRUA6.0001065

DO - 10.1061/AJRUA6.0001065

M3 - Article

AN - SCOPUS:85083202875

VL - 6

JO - ASCE-ASME Journal of Risk and Uncertainty in Engineering Systems, Part A: Civil Engineering

JF - ASCE-ASME Journal of Risk and Uncertainty in Engineering Systems, Part A: Civil Engineering

SN - 2376-7642

IS - 2

M1 - 04020023

ER -