Optimal employment decisions in the hospitality sector under uncertain productivity loss due to catastrophe: A mean-variance utility approach

Abstract

How do exogenous disruptions such as natural disasters affect employment and labour productivity in the hospitality sector? This article addresses this crucial issue by proposing a two-moment (i.e., mean-variance) decision model to determine the pattern of productivity and employment losses in this sector. In our model, a representative hotel owner selects the optimal employment level based on the risk-taking orientation of the manager. During a catastrophe, a high operational fixed investment cost causes optimal employment decisions for a hotel owner to become an endogenous choice variable. Our proposed model and a calibration exercise predict that, on average, as operational uncertainty increases, expected profits decrease substantially, causing managers to terminate employees. Government intervention in the form of a lumpsum grant can be beneficial, but the level of the grant should be contingent on the risk preference of the hotel management. For instance, restoring complete employment with a substantial lump-sum aid may take longer. We discuss the implications of our findings for hospitality sector research and tourism industry professionals.