Natural Disasters and the Intangibility of Risk Reduction: Theory and Experimental Evidence

with Todd Cherry and George Loewenstein

Work in Progress

In this paper, we examine how the observability of disaster sources influences willingness to invest collectively in mitigating an endogenous risk. We begin by developing a theoretical model in which an agent invests to reduce a collective endogenous risk. Feedback about the source of realized losses shifts the agent’s beliefs about investment efficacy. We then test hypotheses derived from the model in a $2\times2$ laboratory experiment that varies the mitigation mechanism (continuous vs. threshold) and the tangibility of the outcome (observable vs. unobservable source feedback). From this experiment, we find three main results. First, across both conditions, prior mitigation success encourages future mitigation. Second, with tangible outcomes, participants respond more strongly to endogenous losses than exogenous ones. Third, with intangible outcomes, disasters with unknown sources reduce future contributions. However, this effect is moderated by the threshold treatment, where coordination failures are most salient. These findings suggest that the effectiveness of mitigation and source feedback jointly determine investment in prevention efforts. This evidence suggests that policymakers should design institutions that make prevention successes visible so that counterfactual benefits of prevention can be rewarded.