Adaptation and Adverse Selection in Markets for Natural Disaster Insurance
Katherine R.H. Wagner
- American Economic Journal: Economic Policy (Forthcoming)
This paper quantifies frictions in uptake, tests for adverse selection, and analyzes welfare
effects of proposed reforms in natural disaster insurance markets. I find that willingness
to pay is remarkably low. In high-risk flood zones, fewer than 60% of homeowners purchase flood insurance even though premia are only two-thirds of own costs. Estimating
flood insurance demand and cost elasticities using house-level variation in premia from
recent U.S. Congressional reforms reveals that these homeowners select into insurance
based on observable differences in adaptation, but not private information about risk.
These findings change the sign of predicted welfare effects of proposed policies.
Forthcoming Article Downloads