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

Laura A. Bakkensen and Lint Barrage

No 23854, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: How do climate risk beliefs affect coastal housing markets? This paper provides theoretical and empirical evidence. First, we build a dynamic housing market model and show that belief heterogeneity can reconcile the mixed empirical evidence on flood risk capitalization. Second, we implement a door-to-door survey in Rhode Island. We find significant flood risk underestimation and sorting based on flood risk beliefs and amenity values. Third, we quantify the model and estimate that coastal prices currently exceed fundamentals by around 13% in our benchmark setting, with the potential for significantly higher overvaluation in other areas. Finally, we quantify both allocative inefficiency and distributional consequences arising from flood risk misperceptions and flood insurance policy reform.

JEL-codes: G12 Q54 R21 (search for similar items in EconPapers)
Date: 2017-09
New Economics Papers: this item is included in nep-env and nep-ure
Note: EEE EFG
References: Add references at CitEc
Citations: View citations in EconPapers (51)

Published as Laura A Bakkensen & Lint Barrage & Stijn Van Nieuwerburgh., 2022. "Going Underwater? Flood Risk Belief Heterogeneity and Coastal Home Price Dynamics," The Review of Financial Studies, vol 35(8), pages 3666-3709.

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