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The Role of Insurance in Managing Natural Hazard Risks: Private Versus Social Decisions
Author(s) -
Epple Dennis,
Lave Lester B.
Publication year - 1988
Publication title -
risk analysis
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.972
H-Index - 130
eISSN - 1539-6924
pISSN - 0272-4332
DOI - 10.1111/j.1539-6924.1988.tb00507.x
Subject(s) - incentive , zoning , natural hazard , flood myth , risk analysis (engineering) , actuarial science , business , hazard , risk management , flood insurance , lead (geology) , environmental planning , economics , microeconomics , finance , engineering , environmental science , civil engineering , philosophy , oceanography , theology , chemistry , organic chemistry , geomorphology , geology
We explore the interaction between individual and collective decisions concerning natural hazards. Collective actions such as building a dam change the risks faced by private individuals. We show that, with proper incentives, individual reactions to such changes in risk can serve to enhance risk management by utilizing individual's decisions to take account of their specialized knowledge about their risk preferences and losses. We demonstrate that the efficient response to construction of a dam may be private actions that lead to a fully anticipated increase in flood damage. In such instances, zoning that focuses on reducing flood damage may lead to less efficient use of the flood plain. More generally, even where incentives for underinvestment in market insurance and self‐insurance are present, constraining use of the flood plain by zoning will not generally lead to efficient outcomes. The model identifying conditions under which informed individuals have the incentives to make efficient decisions is powerful and directs attention toward more fruitful approaches.