Working Paper: CEPR ID: DP10307
Authors: Maarten Bosker; Harry Garretsen; Gerard Marlet; Clemens van Woerkens
Abstract: The Netherlands is one of the most flood prone countries in the world. It also has the best flood defenses in the world that are built to make floods an extremely rare event. This paper uses the unique Dutch setting to provide evidence on the price and perception of rare environmental disasters. In particular, it allows us to precisely identify whether houses in areas that would flood, in case the Dutch flood defenses fail, cost less than otherwise equal homes that do not run any risk. We do this using a border-discontinuity design that heavily relies on the (spatial) detail of our unique dataset covering every housing transaction over the period 1999-2011. Despite ?1.1 billion publicly spent on flood protection each year, we find a 1% flood risk price discount on houses in flood prone areas. The median household living in a flood prone area would be willing to pay an additional ?69 per year to be fully insured against flood risk. Our estimate implies that people?s perceived flood risk is substantially higher than the official protection levels at which the government claims to uphold the country?s flood defenses.
Keywords: House prices; Implicit insurance; Rare flood disasters
JEL Codes: D8; Q54; R21
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| flood-prone houses (Q54) | house prices (R31) |
| flood risk (Q54) | house prices (R31) |
| perceived flood risk (Q54) | willingness to pay for insurance (G52) |
| current public expenditure on flood protection (H12) | perceived flood risk (Q54) |
| marginal willingness to pay to avoid flood risk (J17) | confidence in government flood defenses (H12) |