Natural Disasters and Governmental Aid: Is there a Charity Hazard?

Mark Andor, Daniel Osberghaus and Michael Simora

Ecological Economics, 2020, vol. 169, issue C

Abstract: In the aftermath of natural disasters, governments frequently provide financial aid for affected households. This policy can have adverse effects if individuals anticipate it and forgo private precaution measures. While theoretical literature unequivocally suggests this so called “charity hazard”, empirical studies yield ambiguous results. Drawing on rich survey data from German homeowners, we analyze charity hazard for different private flood precaution strategies and flood exposed vs. non-exposed areas. Our results indicate a substantial charity hazard in the insurance market for individuals residing in flood-prone areas. In contrast, we find a positive correlation between governmental aid and non-financial protection measures. Moreover, our results suggest that insurance and non-financial protection measures are rather complements than substitutes. Finally, we provide suggestive evidence that status-quo bias might play an important role for insurance uptake.

Keywords: Adaptation; Flood protection; Flood insurance; Objective flood exposure; Charity hazard (search for similar items in EconPapers)
JEL-codes: C35 Q54 R22 (search for similar items in EconPapers)
Date: 2020
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Citations: View citations in EconPapers (29)

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Related works:
Working Paper: Natural disasters and governmental aid: Is there a charity hazard? (2017)
Working Paper: Natural disasters and governmental aid: Is there a charity hazard? (2017)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecolec:v:169:y:2020:i:c:s0921800918316094

DOI: 10.1016/j.ecolecon.2019.106534

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