Working Paper: NBER ID: w20018
Authors: Devin Bunten; Matthew E. Kahn
Abstract: In the typical asset market, an asset featuring uninsurable idiosyncratic risk must offer a higher rate of return to compensate risk-averse investors. A home offers a standard asset's risk and return opportunities, but it also bundles access to its city's amenities|and to its climate risks. As climate change research reveals the true nature of these risks, how does the equilibrium real estate pricing gradient change when households can sort into different cities? When the population is homogeneous, the real estate pricing gradient instantly reflects the "new news". With population heterogeneity, an event study research design will underestimate the valuation of climate risk for households in low-risk cities while overestimating the valuation of households in high-risk areas.
Keywords: No keywords provided
JEL Codes: Q54; R3
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| heterogeneous preferences (D11) | valuation of climate risks (Q54) |
| self-protection capabilities (F52) | willingness to pay (D11) |
| local social networks (Z13) | willingness to pay (D11) |
| econometrician's ignorance of household heterogeneity (D12) | accuracy of price reflections (D41) |
| discovery of climate risks (Q54) | wedge in valuation between current residents and potential migrants (J69) |
| heterogeneous population (J11) | real estate pricing gradient change (R31) |
| climate risks (Q54) | real estate prices (R31) |
| new information about climate risks (Q54) | real estate prices in high-risk cities (R31) |