Working Paper: CEPR ID: DP16266
Authors: Alexandra Avdeenko; Onur Eryilmaz
Abstract: This paper investigates whether the 2013 floods in Germany affected risk preferences and mitigation behavior, using a representative, longitudinal data set. Exploiting the circumstance that this weather phenomenon was unanticipated, we provide robust evidence that flood exposure had a depressing impact on individual willingness to take risks. The effect size corresponds to a 4.85 percent reduction from the pre-treatment mean, varies between men and women, and is detectable up to five years after the shock. We show that this change is mediated by changes in well-being. Moreover, we discuss whether these changes in risk aversion may eventually reduce the costly moral hazard problem in climate change mitigation policies. In particular, we document that selection on risk aversion leads to a higher uptake in life insurances in high-risk areas.
Keywords: microeconomic behavior; risk aversion; life insurance; natural disasters
JEL Codes: D01; D03; D81; D84
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Flood exposure (Q54) | Decrease in individual willingness to take risks (D81) |
| Flood exposure (Q54) | Change in well-being (drop in life satisfaction and increased feelings of sadness) (I31) |
| Change in well-being (drop in life satisfaction and increased feelings of sadness) (I31) | Decrease in individual willingness to take risks (D81) |
| Flood exposure (Q54) | Increase in life insurance ownership (G52) |
| Decrease in individual willingness to take risks (D81) | Increase in life insurance ownership (G52) |
| Flood exposure (Q54) | Change in risk preferences (not uniform across genders) (D11) |