TY - JOUR
T1 - An experimental study of charity hazard
T2 - The effect of risky and ambiguous government compensation on flood insurance demand
AU - Robinson, Peter John
AU - Botzen, W. J.Wouter
AU - Zhou, Fujin
N1 - Funding Information:
This research was supported by the Netherlands Organisation for Scientific Research (NWO), Vidi grant number 45214005. The authors would like to thank colleagues at the Institute for Environmental Studies, VU University Amsterdam for helping with the implementation pre-tests. Peter Wakker provided useful suggestions for developing the theoretical framework. We appreciate the comments of Mark Andor on the experiment design.
Publisher Copyright:
© 2021, The Author(s), under exclusive licence to Springer Science+Business Media, LLC, part of Springer Nature.
PY - 2021/12
Y1 - 2021/12
N2 - This paper examines the problem of “charity hazard,” which is the crowding out of private insurance demand by government compensation. In the context of flood insurance and disaster financing, charity hazard is particularly worrisome given current trends of increasing flood risks as a result of climate change and more people choosing to locate in high-risk areas. We conduct an experimental analysis of the influence on flood insurance demand of risk and ambiguity preferences and the availability of different forms of government compensation for disaster damage. Certain and risky government compensation crowd out demand, confirming charity hazard, but this is not observed for ambiguous compensation. Ambiguity averse subjects have higher insurance demand when government compensation is ambiguous relative to risky. Policy recommendations are discussed to overcome charity hazard.
AB - This paper examines the problem of “charity hazard,” which is the crowding out of private insurance demand by government compensation. In the context of flood insurance and disaster financing, charity hazard is particularly worrisome given current trends of increasing flood risks as a result of climate change and more people choosing to locate in high-risk areas. We conduct an experimental analysis of the influence on flood insurance demand of risk and ambiguity preferences and the availability of different forms of government compensation for disaster damage. Certain and risky government compensation crowd out demand, confirming charity hazard, but this is not observed for ambiguous compensation. Ambiguity averse subjects have higher insurance demand when government compensation is ambiguous relative to risky. Policy recommendations are discussed to overcome charity hazard.
KW - Ambiguity preferences
KW - Charity hazard
KW - Economic experiment
KW - Flood insurance demand
KW - Risk preferences
UR - http://www.scopus.com/inward/record.url?scp=85119697258&partnerID=8YFLogxK
U2 - 10.1007/s11166-021-09365-6
DO - 10.1007/s11166-021-09365-6
M3 - Article
AN - SCOPUS:85119697258
SN - 0895-5646
VL - 63
SP - 275
EP - 318
JO - Journal of Risk and Uncertainty
JF - Journal of Risk and Uncertainty
IS - 3
ER -