Moral Hazard vs. Land Scarcity : Flood Management Policies for the Real World
This paper investigates the costs and benefits of three ex ante flood management strategies -- risk-based insurance, zoning, and subsidized insurance -- in an urban economics framework that takes land scarcity into account. In a theoretical setting...
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World Bank, Washington, DC
2019
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| Online Access: | http://documents.worldbank.org/curated/en/523861568387904704/Moral-Hazard-vs-Land-Scarcity-Flood-Management-Policies-for-the-Real-World http://hdl.handle.net/10986/32420 |
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okr-10986-324202022-09-19T12:17:07Z Moral Hazard vs. Land Scarcity : Flood Management Policies for the Real World Avner, Paolo Hallegatte, Stephane URBAN ECONOMICS URBAN FLOODS INSURANCE LAND USE MORAL HAZARD LAND SCARCITY RISK MANAGEMENT This paper investigates the costs and benefits of three ex ante flood management strategies -- risk-based insurance, zoning, and subsidized insurance -- in an urban economics framework that takes land scarcity into account. In a theoretical setting and in the absence of market failures, risk-based insurance perfectly internalizes flood risks and maximizes social welfare. However, risk-based insurance faces major technical, social, and political challenges and is not always realistic. Flood zoning and subsidized insurance are two second-best options that are easier to implement and less technically demanding. The paper explores analytically and with numerical simulations the welfare losses and distributional impacts with these second-best options, and demonstrates that total losses often remain small. Flood zoning is close to optimal when flood-prone areas are small, floods are frequent, and housing quality is low. Zoning keeps total land value unchanged but transfers wealth from landowners in flood-prone areas to landowners in safe locations. Subsidized insurance is close to optimal when a large fraction of a city is flood prone, floods are rare, and housing quality is high. And although it increases flood losses through the moral hazard effect, subsidized insurance encourages more construction, which reduces housing rents and benefits tenants regardless of where they live. Subsidized insurance transfers wealth from landowners in safe locations to landowners in flood-prone areas. When the implementation of risk-based insurance is unrealistic, as is often the case in developing countries, a combination of zoning in high-risk areas and subsidized insurance for low-risk areas might be a good alternative. 2019-09-19T18:52:30Z 2019-09-19T18:52:30Z 2019-09 Working Paper http://documents.worldbank.org/curated/en/523861568387904704/Moral-Hazard-vs-Land-Scarcity-Flood-Management-Policies-for-the-Real-World http://hdl.handle.net/10986/32420 English Policy Research Working Paper;No. 9012 CC BY 3.0 IGO http://creativecommons.org/licenses/by/3.0/igo World Bank World Bank, Washington, DC Publications & Research Publications & Research :: Policy Research Working Paper |
| repository_type |
Digital Repository |
| institution_category |
Foreign Institution |
| institution |
Digital Repositories |
| building |
World Bank Open Knowledge Repository |
| collection |
World Bank |
| language |
English |
| topic |
URBAN ECONOMICS URBAN FLOODS INSURANCE LAND USE MORAL HAZARD LAND SCARCITY RISK MANAGEMENT |
| spellingShingle |
URBAN ECONOMICS URBAN FLOODS INSURANCE LAND USE MORAL HAZARD LAND SCARCITY RISK MANAGEMENT Avner, Paolo Hallegatte, Stephane Moral Hazard vs. Land Scarcity : Flood Management Policies for the Real World |
| relation |
Policy Research Working Paper;No. 9012 |
| description |
This paper investigates the costs and
benefits of three ex ante flood management strategies --
risk-based insurance, zoning, and subsidized insurance -- in
an urban economics framework that takes land scarcity into
account. In a theoretical setting and in the absence of
market failures, risk-based insurance perfectly internalizes
flood risks and maximizes social welfare. However,
risk-based insurance faces major technical, social, and
political challenges and is not always realistic. Flood
zoning and subsidized insurance are two second-best options
that are easier to implement and less technically demanding.
The paper explores analytically and with numerical
simulations the welfare losses and distributional impacts
with these second-best options, and demonstrates that total
losses often remain small. Flood zoning is close to optimal
when flood-prone areas are small, floods are frequent, and
housing quality is low. Zoning keeps total land value
unchanged but transfers wealth from landowners in
flood-prone areas to landowners in safe locations.
Subsidized insurance is close to optimal when a large
fraction of a city is flood prone, floods are rare, and
housing quality is high. And although it increases flood
losses through the moral hazard effect, subsidized insurance
encourages more construction, which reduces housing rents
and benefits tenants regardless of where they live.
Subsidized insurance transfers wealth from landowners in
safe locations to landowners in flood-prone areas. When the
implementation of risk-based insurance is unrealistic, as is
often the case in developing countries, a combination of
zoning in high-risk areas and subsidized insurance for
low-risk areas might be a good alternative. |
| format |
Working Paper |
| author |
Avner, Paolo Hallegatte, Stephane |
| author_facet |
Avner, Paolo Hallegatte, Stephane |
| author_sort |
Avner, Paolo |
| title |
Moral Hazard vs. Land Scarcity : Flood Management Policies for the Real World |
| title_short |
Moral Hazard vs. Land Scarcity : Flood Management Policies for the Real World |
| title_full |
Moral Hazard vs. Land Scarcity : Flood Management Policies for the Real World |
| title_fullStr |
Moral Hazard vs. Land Scarcity : Flood Management Policies for the Real World |
| title_full_unstemmed |
Moral Hazard vs. Land Scarcity : Flood Management Policies for the Real World |
| title_sort |
moral hazard vs. land scarcity : flood management policies for the real world |
| publisher |
World Bank, Washington, DC |
| publishDate |
2019 |
| url |
http://documents.worldbank.org/curated/en/523861568387904704/Moral-Hazard-vs-Land-Scarcity-Flood-Management-Policies-for-the-Real-World http://hdl.handle.net/10986/32420 |
| _version_ |
1764476512340279296 |