Moral Hazard, Wildfires, and the Economic Incidence of Natural Disasters

86 Pages Posted: 16 Dec 2019 Last revised: 18 Jul 2022

See all articles by Patrick Baylis

Patrick Baylis

University of British Columbia (UBC) - Department of Economics

Judson Boomhower

University of California, San Diego (UCSD) - Department of Economics

Date Written: December 2019

Abstract

This study measures the degree to which large public expenditures on wildfire protection subsidize development in harm's way. Using administrative firefighting data, we calculate geographically-differentiated implicit subsidies to homeowners throughout the western USA. We first examine how the presence of homes affects firefighting expenditures. These results are used to reconstruct the implied historical cost of protecting each home and to perform an actuarial calculation of expected future protection cost. The expected net present value of this subsidy can exceed 20% of a home's value. It increases with fire risk and decreases surprisingly steeply with development density. A simple model is used to explore effects on expansion of developed areas, density, and private risk-reducing investments. These results demonstrate how policy and institutions influence the costs imposed by a changing climate.

Suggested Citation

Baylis, Patrick and Boomhower, Judson, Moral Hazard, Wildfires, and the Economic Incidence of Natural Disasters (December 2019). NBER Working Paper No. w26550, Available at SSRN: https://ssrn.com/abstract=3504434

Patrick Baylis (Contact Author)

University of British Columbia (UBC) - Department of Economics ( email )

997-1873 East Mall
Vancouver, BC V6T 1Z1
Canada

Judson Boomhower

University of California, San Diego (UCSD) - Department of Economics ( email )

9500 Gilman Drive
La Jolla, CA 92093-0508
United States

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