Essays on the Economics of Disaster Risk

Philip Mulder, University of Pennsylvania


This dissertation explores disaster risk in the context of a changing climate, imperfect public policies, and frictions that limit the capitalization of current and future climate risk in housing markets. The chapters' results suggest how better provision of information and policies that internalize homeowners' and lenders' climate exposure can ameliorate the costs of climate change in real estate markets. In my first chapter, I study the economic consequences of using better flood risk models to more accurately identify and price flood insurance for high-risk homes. I estimate my results with administrative flood insurance policy data and a novel survey measuring flood insurance demand, risk perceptions, and objective risk. To identify the effects of risk information, I use variation created by outdated elevation data and risk models that caused high-risk homes to be misclassified as low-risk. My findings show that flood risk classification provides valuable information not only for insurers, but also for homeowners. Misclassifying high-risk homes as low-risk causes owners to underestimate their current and future flood risk, invest less in risk-reducing adaptation, and buy less flood insurance despite substantially lower premiums. Embedding these estimates in a sufficient statistics model with dynamic risk and endogenous risk beliefs and adaptation, I find that identifying and pricing the estimated six million high-risk homes outside the floodplain would increase social welfare by \$138 billion. In the second chapter, co-authored with Professor Benjamin Keys, we explore dynamic changes in the capitalization of sea level rise (SLR) risk in housing and mortgage markets. Our results suggest a disconnect in coastal Florida real estate: From 2013-2016, home sales volumes in the most-SLR-exposed communities declined 20\% relative to less-SLR-exposed areas, even as their sale prices grew in lockstep. By 2019, however, relative prices in these at-risk markets finally declined 5\% from their peak. Over this period, home sellers accumulated an excess inventory of unsold properties as they maintained high list prices and transaction volumes declined. Lender behavior cannot reconcile these patterns, as both all-cash and mortgage-financed purchases similarly contracted, with little increase in loan denials or securitization. We propose a demand-side explanation for our findings where SLR risk has become more salient in the home price expectations of prospective buyers than sellers. The lead-lag relationship between transaction volumes and prices in SLR-exposed markets is consistent with dynamics at the peak of prior real estate bubbles. In the third chapter, co-authored with Dr. Yanjun Liao, we study how home equity influences homeowners' decisions to insure flood risk. We show that low home equity is an important driver of low flood insurance take-up. To isolate the causal effect of home equity on flood insurance demand, we exploit price changes over the housing boom and bust. Insurance take-up follows house price dynamics closely, with a home price elasticity around 0.3. Multiple mechanism tests show evidence consistent with a debt overhang channel, whereby uninsured households with low equity rely on mortgage default to manage their flood risk. As a result, households do not fully internalize their disaster risk.

Subject Area

Economic theory

Recommended Citation

Mulder, Philip, "Essays on the Economics of Disaster Risk" (2022). Dissertations available from ProQuest. AAI29062923.