Flood Risk Belief Heterogeneity and Coastal Home Price Dynamics: Going Under Water?

Laura A. Bakkensen, Lint Barrage

NBER Working Paper No. 23854
Issued in September 2017
NBER Program(s):Environment and Energy Economics, Economic Fluctuations and Growth

How will climate risk beliefs affect coastal housing market dynamics? This paper provides both theoretical and empirical evidence: First, we build a dynamic housing market model with heterogeneity in home types, consumer preferences, and flood risk beliefs. The model incorporates a Bayesian learning mechanism allowing agents to update their beliefs depending on whether flood events occur. Second, to quantify these elements, we implement a door-to-door survey campaign in Rhode Island. The results confirm significant heterogeneity in flood risk beliefs, and that selection into coastal homes is driven by both lower risk perceptions and higher coastal amenity values. Third, we calibrate the model to simulate coastal home price trajectories given a future flood risk increase and policy reform across different belief scenarios. Accounting for heterogeneity increases the projected home price declines due to sea level rise by a factor of four, and increases market volatility by an order of magnitude. Studies assuming homogeneous rational expectations may thus substantially underestimate the home price implications of future climate risks. We conclude by highlighting potential implications for welfare and flood policy.

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Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w23854

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