Prevent or Report? Managing Near Misses for Safer Operations

Problem Definition: Firms can reduce the risk of rare disasters by accounting for more frequent near misses: precursor events that could have escalated to a disaster but did not. Investigating a near miss reveals its root cause, allowing the firm to improve process safety and reduce disaster risk. A managing firm, however, usually does not directly observe the occurrence of a near miss but instead relies on the report of an agent (an employee or contractor) who is also responsible for precautionary measures that prevent such incidents. This paper explains why near-miss reporting may not take place in such a decentralized setting. Academic/practical relevance: Literature and practitioners have acknowledged the crucial role of near-miss reports in improving process safety. Nevertheless, even at sophisticated and experienced organizations, disaster inquiries invariably uncover a history of unreported or ignored near misses preceding an accident. We provide an explanation for this persistent phenomenon based on rational economic incentives. Methodology: We examine the firm's problem through a dynamic principal-agent model that captures the agent's potential for under-reporting near misses along with moral hazard related to their precautionary effort. Results: We find that the firm may fail to capitalize on near miss information because of conflicting incentives. For instance, the agent may be unwilling to report near misses because the resulting safety improvements hurt them financially. This happens because safety improvements replace the need for the agent's precautionary effort, thereby lowering moral hazard and allowing the firm to extract more rent from the agent. However, even when the agent is willing to report near misses, we find that the firm may choose not to record them, opting instead to create stronger incentives for precaution. In both scenarios, the firm forgoes opportunities for process-safety improvement and instead focuses on existing precautionary measures. Managerial implications: Our findings highlight the challenges in providing incentives for both reporting and precautionary measures that can result in a failure to leverage near miss information. We examine remedies that alleviate these issues and increase reporting in both voluntary and mandatory reporting environments.