Moral Hazard, Wildfires, and the Economic Incidence of Natural Disasters
This study measures the degree to which large public expenditures on wildfire protection subsidize development in harm's way. Using administrative firefighting data, we calculate geographically-differentiated implicit subsidies to homeowners throughout the western USA. We first examine how the presence of homes affects firefighting expenditures. These results are used to reconstruct the implied historical cost of protecting each home and to perform an actuarial calculation of expected future protection cost. The expected net present value of this subsidy can exceed 20% of a home's value. It increases with fire risk and decreases surprisingly steeply with development density. A simple model is used to explore effects on expansion of developed areas, density, and private risk-reducing investments. These results demonstrate how policy and institutions influence the costs imposed by a changing climate.
The authors gratefully acknowledge research support from the Stanford Institute for Economic Policy Research (Boomhower), the Stanford Center on Food Security and the Environment (Baylis), and the Giannini Foundation. We are grateful to seminar participants at the NBER Summer Institute, the AERE Summer Conference, the UC Santa Barbara Occasional Workshop, WEAI, ASSA, Arizona State University, University of British Columbia, UC Berkeley, UC San Diego, University of Illinois, Indiana University, Nova School of Business and Economics, University of Ottawa, University of Pennsylvania (Wharton), University of Southern California, Stanford University, and University of Victoria. We also extend our thanks to Laura Bakkensen, Severin Borenstein, Marshall Burke, Richard Carson, Brian Copeland, Marc Conte, Lucas Davis, Joshua Gottlieb, Larry Goulder, Mark Jacobsen, Lee Lockwood, Jim Stock, and Matthew Wibbenmeyer. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.
- Fire protection costs — paid for by the federal government — are not considered by prospective homeowners and local authorities when...