Does the Salience of Climate-Related Risk Affect Asset Prices?

Abstract

Using regression discontinuity and difference-in-differences designs to compare prices of California homes across a new wildfire risk zone boundary, I identify null effects in the immediate vicinity of the new risk zone boundary. In contrast, prices of homes newly assigned to a riskier zone drop by 2.5% further away from the new risk zone boundary. These findings suggest that households do not respond to the risk salience triggered by the new risk zone assignment, but instead update their risk beliefs in response to re-zoning in a way that is consistent with the actual wildfire risk.

Keywords: climate-related risks, risk salience, risk zoning, regression discontinuity design, difference-in-discontinuities, real estate

JEL Classification: D83, G1, G14, G18, Q54, R30