Learning About an Infrequent Event: Evidence from Flood Insurance Take-Up in the US
43 Pages Posted: 30 Nov 2017
Date Written: October 31, 2013
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 non-flooded 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.
JEL Classification: D03, D14, D81, Q54
Suggested Citation: Suggested Citation