DP10307 | Nether Lands: Evidence on the price and perception of rare flood disasters

Publication Date

21/12/2014

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Abstract

The Netherlands is one of the most flood prone countries in the world. It also has the best flood defenses in the world that are built to make floods an extremely rare event. This paper uses the unique Dutch setting to provide evidence on the price and perception of rare environmental disasters. In particular, it allows us to precisely identify whether houses in areas that would flood, in case the Dutch flood defenses fail, cost less than otherwise equal homes that do not run any risk. We do this using a border-discontinuity design that heavily relies on the (spatial) detail of our unique dataset covering every housing transaction over the period 1999-2011. Despite ?1.1 billion publicly spent on flood protection each year, we find a 1% flood risk price discount on houses in flood prone areas. The median household living in a flood prone area would be willing to pay an additional ?69 per year to be fully insured against flood risk. Our estimate implies that people?s perceived flood risk is substantially higher than the official protection levels at which the government claims to uphold the country?s flood defenses.