Panel Paper: Moving to Flood Plains: How Perverse Incentives of the National Flood Insurance Program Affect Population Flows

Friday, November 9, 2018
Taylor - Mezz Level (Marriott Wardman Park)

*Names in bold indicate Presenter

Abigail Allison Peralta and Jonathan B. Scott, Texas A&M University

Despite the large costs of covering flood losses, little is known about whether flood insurance availability affects the decision to move and stay in more flood-prone areas. In this paper, we present evidence that suggests households in flood-prone areas would have otherwise moved to less risky areas absent flood insurance availability. This moral hazard imposes an additional cost to the National Flood Insurance Program (NFIP), which has to insure households who might otherwise expose themselves to less risk. This adds to the many inefficiencies of the NFIP, and also inhibits potential climate change adaptation efforts.

The challenge in identifying the effects of NFIP is that joining is voluntary. Since it is reasonable to think that communities would be more or less likely to join depending on their particular circumstances, directly using NFIP adoption may incorrectly identify the causal effect of flood insurance. For example, increased migration into an area could alter its flood risk, making it more likely to enroll into the program. To identify the direct effects of flood insurance, we instead exploit the within- and across-county variation in the various nudges that the Federal Emergency Management Agency (FEMA) used to induce flood-prone areas to join the NFIP.

Results suggest that flood insurance availability caused population to increase by 4 to 5 percent in high flood-risk counties. These estimates are robust to using various specifications and falsification tests. Furthermore, by considering the intensity of historical flood risk by area, we find that NFIP causes a 4.4 percent increase in population per one standard deviation increase in risk. We attribute most of this effect from the increased propensity of current residents to stay in flood-prone areas, rather than move, though we do find some evidence of increased migration into these areas. Our pattern of results suggest that, to the extent that shielding people from the full cost of flood insurance led them to take on additional risk that they otherwise would have avoided, the current structure of the NFIP contributes to its own increasing cost through its effect on increasing populations in risky areas.

Full Paper: