Panel Paper:
Does Federal Disaster Assistance Affect Private Protection Behavior: An Empirical Analysis of Household Purchase of Flood Insurance
*Names in bold indicate Presenter
Our empirical analysis is based on an unbalanced panel of all NFIP participating counties between 1983 and 2009. We employ instrumental variable model and along other explanatory variables, use political motivation of federal disaster aid as well as historical rainfall anomalies to instrument for endogenous federal spending variables. Our results indicate increasing spending in programs targeting at rebuilding public goods and recovery as well as individual housing assistance reduce insurance take up rates as well as total dollar coverage, however no effects were detected for the average coverage per policy. This suggests that the federal assistance may affect the extensive margin rather than intensive margin. We also find that flood insurance take-up rates and coverage are higher in wealthier counties, and highly responsive to current and prior year’s flooding shocks.
Our research has important implications for U.S. disaster policy. It suggests the different policy instruments may provide conflicted incentives in private efforts of mitigating and transferring hazard risks. While the NFIP program has grown significantly since its inception in response to various reforms and amendments, low take up rates still remain a concern across communities exposed to frequent floods and inundation risk. If flood insurance take-up decisions are crowded out by federal disaster assistance, this suggests we should re-evaluate the real costs of federal assistance by accounting for the implicit losses due to flood insurance dropout. From this perspective, our research also sheds light on the increased federal financial exposure to natural hazards (i.e. floods) in the face of climate change.