The Intricacy of Adapting to Climate Change: Flood Protection as a Local Public Goods Game

Abstract

We study adaptation to climate change in a federalist setting. To protect themselves against an increase in flood risk, regional governments choose among adaptation measures that vary with respect to their costs, the level of protection they offer, and the presence and nature of spillovers to neighboring regions. The central government can provide co-funding in response to specific proposals. If it has to deduce the vulnerability of regions by their actions, the resulting adaptation measures are too costly from a social point of view. The results show that adaptation cannot be expected to be efficient without specifically designed incentive schemes.

Keywords: climate change, adaptation, federalism, asymmetric information, vertical interaction, spillovers, non-cooperative games, signaling

JEL Classification: C720, C730, H230, H410, H770, Q520, Q540, Q580, R530