Working Paper: NBER ID: w23854
Authors: Laura A. Bakkensen; Lint Barrage
Abstract: How do climate risk beliefs affect coastal housing markets? This paper provides theoretical and empirical evidence. First, we build a dynamic housing market model and show that belief heterogeneity can reconcile the mixed empirical evidence on flood risk capitalization. Second, we implement a door-to-door survey in Rhode Island. We find significant flood risk underestimation and sorting based on flood risk beliefs and amenity values. Third, we quantify the model and estimate that coastal prices currently exceed fundamentals by around 13% in our benchmark setting, with the potential for significantly higher overvaluation in other areas. Finally, we quantify both allocative inefficiency and distributional consequences arising from flood risk misperceptions and flood insurance policy reform.\n
Keywords: flood risk; housing market; belief heterogeneity; climate change; coastal properties
JEL Codes: G12; Q54; R21
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| flood risk perceptions (H12) | housing prices (R31) |
| belief heterogeneity (B00) | housing prices (R31) |
| belief heterogeneity (B00) | bubbles and credit crises (E32) |
| flood risk misperceptions (H84) | overvaluation of coastal home prices (R31) |
| households' beliefs about long-term flood insurance policy (G52) | current housing prices (R31) |
| past experiences of flood events (Q54) | agents' beliefs update (D83) |