On the Sensitivity of Impact Estimates for Fixed Ratio Assumptions

What is it about?

Firms react to shortages in the supply of their inputs by looking for substitutes. We investigate the impact of finding such substitutes on estimates of the size of regional and national disaster impacts. To investigate this issue, we use the German multiregional supply-use table (MRSUT) for 2007, together with data on the direct impacts of the 2013 heavy floods of the German Elbe and the Danube rivers. Our analysis starts with a non-linear programming model that allows for maximum substitution possibilities. In that case there are little to no indirect damages in the directly affected regions, whereas negative indirect impacts of a magnitude of 5–7% and of up to 34% of the direct impact occur in other German regions and abroad, respectively. Adding the increasingly less plausible fixed ratios commonly used in standard Type I and extended Type II multiregional input-output and MRSUT models, results in (1) substantial increases in the magnitude of negative indirect impacts and (2) a significant shift in the intra-regional versus interregional and international distribution of these impacts. Our conclusion is that both demand-driven and supply-driven input-output and supply-use models tend to grossly overstate the indirect damages of negative supply shocks, which are part and parcel of most disasters.

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