Speaker: Katherine Wagner from Stanford University
Seminar Abstract:In this presentation we discuss social welfare in markets for natural disaster insurance. We quantify frictions in uptake, test for adverse selection, and estimate the welfare effects of proposed policy reforms by developing a model of natural disaster insurance markets and compiling new data. The research has three main findings. First, willingness to pay for natural disaster insurance is remarkably low. In the high-risk flood zones throughout all U.S. Atlantic and Gulf Coast states, fewer than 60% of homeowners purchase flood insurance even though subsidized premia are only two-thirds of their own expected payouts. Second, homeowners select into insurance based on observable differences in houses' defensive investments against natural disasters (i.e., adaptation), but not on private information about risk. Exploiting house-level variation in flood insurance prices and construction codes reveals that requirements to elevate newly constructed homes reduce insurer costs by 31% and insurance demand by 25%. Asymmetric information between homeowners and insurers, however, does not affect average payouts. Third, ignoring how frictions, such as risk misperception, distort demand understates the welfare cost of currently proposed price increases and changes the sign of the predicted welfare effect. In contrast, enforcing a natural disaster insurance mandate increases social welfare.
Speaker Bio: Katherine Wagner is a Postdoctoral Fellow at the Stanford Institute for Economic Policy Research (SIEPR). Her research focuses primarily on Environmental and Energy Economics and Public Finance. She uses a range of empirical tools to study questions related to environmental externalities, climate change, and natural resources. She joined SIEPR after completing her PhD in Economics at Yale University in 2020. In July 2021, she will join the University of California, Berkeley as an Assistant Professor in the Department of Agricultural and Resource Economics.
Seminar is open to all Stanford students, faculty and staff. Register via the RSVP link.