We found a match
Your institution may have access to this item. Find your institution then sign in to continue.
- Title
Uncertain Hazards, Insurance, and Consumer Choice: Evidence from Housing Markets.
- Authors
MacDonald, Don N.; Murdoch, James C.; White, Harry L.
- Abstract
In this particular paper, we contribute to both of these areas of relevance. A methodology is developed for estimating willingness to pay for a reduction in the probability of flooding in an urban area. These estimates can potentially be used in developing benefit/cost analyses. The theoretical development here enhances previous research efforts in that we examine a reduction in probability. Other studies examine a reduction in losses, not likelihood, when modeling willingness to pay. The approach taken is based on the supply uncertainty case in the option price literature and follows Smith (1985). Changes in probability seem to be especially relevant to the location decision in urban areas with flooding hazard. More importantly, the nature of the urban flooding case enables us to develop criteria for stronger tests of the viability of using urban housing markets to test consumer behavior and measure economic benefits. Because of the availability of flood insurance in most urban areas subject to flooding hazard, consumers have a choice: pay higher insurance premiums in areas with a greater likelihood of flooding or pay higher housing costs in areas with lower probabilities of flooding. The insurance premium differentials provide an exogenous measure to compare with the property value differentials. In some cases, the insurance premium differentials can actually be used to calibrate the accuracy of the estimated property value differentials. Thus, more (or less) confidence can be placed on the hedonic method for revealing consumers willingness to pay for a reduced likelihood of the hazard occurring. The empirical results, based on data from a homogeneous housing market subject to flooding hazard and participating in the federal flood insurance program, indicate that the property value differentials are influenced by flooding hazard. Further, the estimated differential from the hedonic method, when compared to the insurance premium differential, tends to support the theory of consumer behavior under uncertainty. The remainder of this paper is organized as follows. In the next section, the theory of how residential housing markets can reveal willingness to pay is logically developed. The data are described in section III. The empirical results and comparisons are presented in section IV while conclusions are given in the last section.
- Subjects
LOUISIANA; MONROE (La.); UNITED States; FLOOD insurance; CONSUMER behavior; INSURANCE premiums; RESIDENTIAL real estate; FLOODS; NATURAL disasters; HOUSING; VALUATION; URBAN economics
- Publication
Land Economics, 1987, Vol 63, Issue 4, p361
- ISSN
0023-7639
- Publication type
Article
- DOI
10.2307/3146293