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A Real Options‐Based Decision‐Making Model for Infrastructure Investment to Prevent Rainstorm Disasters

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  • Tao Wang
  • Bingsheng Liu
  • Jiaming Zhang
  • Guijun Li

Abstract

Extreme precipitation caused by global climate change is expected to have a severe impact on urbanized areas. While decision‐makers struggle with climate uncertainty, an effective infrastructure adaptation strategy attaches great importance to preventing disasters resulting from rainfall. We propose a decision‐making model to incorporate the probability of rainfall disasters and recommend investing time when evaluating projects related to climate adaptation. We use a hydrological statistical model and economic and technical factors to estimate the expected economic losses in several rainfall disaster scenarios, and the value of the adaptation infrastructures is calculated using a real options pricing approach. Then the decision‐making model is applied to a case study involving a campus rainfall disaster prevention facility at the Central University of Finance and Economics in Beijing, China. We established three submerged scenarios with different rainfall intensities, then we evaluated the premium of holding an option to defer and pointed out the optimal investing time in each scenario. This model is expected to provide guidance for the development of adaptation infrastructure for relatively small areas such as communities and universities. And we proved that using real options‐based approach could provide more managerial flexibility for investors.

Suggested Citation

  • Tao Wang & Bingsheng Liu & Jiaming Zhang & Guijun Li, 2019. "A Real Options‐Based Decision‐Making Model for Infrastructure Investment to Prevent Rainstorm Disasters," Production and Operations Management, Production and Operations Management Society, vol. 28(11), pages 2699-2715, November.
  • Handle: RePEc:bla:popmgt:v:28:y:2019:i:11:p:2699-2715
    DOI: 10.1111/poms.13074
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    Cited by:

    1. Alain Bensoussan & Benoît Chevalier‐Roignant & Alejandro Rivera, 2022. "A model for wind farm management with option interactions," Production and Operations Management, Production and Operations Management Society, vol. 31(7), pages 2853-2871, July.
    2. Magoua, Joseph Jonathan & Li, Nan, 2023. "The human factor in the disaster resilience modeling of critical infrastructure systems," Reliability Engineering and System Safety, Elsevier, vol. 232(C).
    3. Alain Bensoussan & Benoit Chevalier-Roignant & Alejandro Rivera, 2022. "A model for wind farm management with option interactions," Post-Print hal-04325553, HAL.
    4. Qin, Jindong & Li, Minxuan & Wang, Xiaojun & Pedrycz, Witold, 2024. "Collaborative emergency decision-making: A framework for deep learning with social media data," International Journal of Production Economics, Elsevier, vol. 267(C).
    5. Yi, Changsheng & Chen, Zhaoming & Chen, Hongchen, 2023. "Opportunity knocks but just once: Impact of infrastructure investment decision on climate adaptation to flood events," Omega, Elsevier, vol. 121(C).
    6. Huberts, Nick F.D. & Thijssen, Jacco J.J., 2023. "Optimal timing of non-pharmaceutical interventions during an epidemic," European Journal of Operational Research, Elsevier, vol. 305(3), pages 1366-1389.

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