American Economic Journal: Applied Economics: Vol. 6 No. 3 (July 2014)

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Learning about an Infrequent Event: Evidence from Flood Insurance Take-Up in the United States

Article Citation

Gallagher, Justin. 2014. "Learning about an Infrequent Event: Evidence from Flood Insurance Take-Up in the United States." American Economic Journal: Applied Economics, 6(3): 206-33.

DOI: 10.1257/app.6.3.206

Abstract

I examine the learning process that economic agents use to update their expectation of an uncertain and infrequently observed event. I use a new nation-wide panel dataset of large regional floods and flood insurance policies to show that insurance take-up spikes the year after a flood and then steadily declines to baseline. Residents in nonflooded communities in the same television media market increase take-up at one-third the rate of flooded communities. I find that insurance take-up is most consistent with a Bayesian learning model that allows for forgetting or incomplete information about past floods.

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Online Appendix (682.08 KB) | Download Data Set (661.71 MB) | Author Disclosure Statement(s) (33.59 KB)

Authors

Gallagher, Justin (Case Western Reserve U)

JEL Classifications

D12: Consumer Economics: Empirical Analysis
D83: Search; Learning; Information and Knowledge; Communication; Belief
D84: Expectations; Speculations
G22: Insurance; Insurance Companies; Actuarial Studies
Q54: Climate; Natural Disasters; Global Warming

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