Association for Public Policy Analysis & Management

The National Flood Insurance Program (NFIP) was enacted to combat the risk of flooding, one of the costliest natural disasters in the United States. While the program was created, in part, to solve a market incompleteness problem, it has been criticized for having, in some cases, highly subsidized premiums, possibly hindering the program’s ability to efficiently smooth flood risk across space and time. In addition, the potential for preference heterogeneity to avoid flood risk adds complexity to the analysis of flood risk and the NFIP. Key policy questions surround these issues. In particular, are there systematic differences in the extent to which individuals of different sociodemographic backgrounds sort over flood risk? If so, what are the potential distributional consequences of NFIP reform?

In this paper, we estimate household preferences to avoid flood risk in the presence of heterogeneous sorting. Using data on 2010 house sales across Miami-Dade, Port St. Lucie, Fort Lauderdale Combined Statistical Area, we start by estimating a discrete choice, residential sorting model that accounts for household specific flood insurance premiums and subsidies to recover heterogeneous preferences for neighborhood attributes (e.g. internalized flood risk) by homeowner race and income. Structural preference parameters recovered from the sorting model allow us to predict changes in the distribution of household types across flood risk, had a (counterfactual) change in flood insurance premium prices (e.g. from removal of subsidies in National Flood Insurance Program premiums) taken place. We offer three contributions to the literature. First, we generate new estimates of the Marginal Willingness to Pay (MWTP) to avoid flood risk. Second, our sorting model explores heterogeneity in MWTP to avoid flood hazards, as the distribution of preferences for flood risks is key to assessing the extent to which vulnerable sub-populations systematically sort into higher risk areas. Lastly, we contribute to the discourse on distributional equity regarding natural hazards policies.