Abstract
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.
| Original language | English |
|---|---|
| Pages (from-to) | 275-318 |
| Number of pages | 44 |
| Journal | Journal of Risk and Uncertainty |
| Volume | 63 |
| Issue number | 3 |
| Early online date | 4 Dec 2021 |
| DOIs | |
| Publication status | Published - Dec 2021 |
Bibliographical note
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.
Keywords
- Ambiguity preferences
- Charity hazard
- Economic experiment
- Flood insurance demand
- Risk preferences
