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Moral Hazard vs. Land Scarcity: Flood Management Policies for the Real World

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dc.contributor.authorHallegatte, Stephane
dc.contributor.authorAvner, Paolo
dc.date.accessioned2019-09-19T18:52:30Z
dc.date.available2019-09-19T18:52:30Z
dc.date.issued2019-09
dc.description.abstractThis paper investigates the costs and benefits of three ex ante flood management strategies -- risk-based insurance, zoning, and subsidized insurance -- in an urban economics framework that takes land scarcity into account. In a theoretical setting and in the absence of market failures, risk-based insurance perfectly internalizes flood risks and maximizes social welfare. However, risk-based insurance faces major technical, social, and political challenges and is not always realistic. Flood zoning and subsidized insurance are two second-best options that are easier to implement and less technically demanding. The paper explores analytically and with numerical simulations the welfare losses and distributional impacts with these second-best options, and demonstrates that total losses often remain small. Flood zoning is close to optimal when flood-prone areas are small, floods are frequent, and housing quality is low. Zoning keeps total land value unchanged but transfers wealth from landowners in flood-prone areas to landowners in safe locations. Subsidized insurance is close to optimal when a large fraction of a city is flood prone, floods are rare, and housing quality is high. And although it increases flood losses through the moral hazard effect, subsidized insurance encourages more construction, which reduces housing rents and benefits tenants regardless of where they live. Subsidized insurance transfers wealth from landowners in safe locations to landowners in flood-prone areas. When the implementation of risk-based insurance is unrealistic, as is often the case in developing countries, a combination of zoning in high-risk areas and subsidized insurance for low-risk areas might be a good alternative.en
dc.identifierhttp://documents.worldbank.org/curated/en/523861568387904704/Moral-Hazard-vs-Land-Scarcity-Flood-Management-Policies-for-the-Real-World
dc.identifier.doi10.1596/1813-9450-9012
dc.identifier.urihttps://hdl.handle.net/10986/32420
dc.languageEnglish
dc.publisherWorld Bank, Washington, DC
dc.relation.ispartofseriesPolicy Research Working Paper;No. 9012
dc.rightsCC BY 3.0 IGO
dc.rights.holderWorld Bank
dc.rights.urihttp://creativecommons.org/licenses/by/3.0/igo
dc.subjectURBAN ECONOMICS
dc.subjectURBAN FLOODS
dc.subjectINSURANCE
dc.subjectLAND USE
dc.subjectMORAL HAZARD
dc.subjectLAND SCARCITY
dc.subjectRISK MANAGEMENT
dc.titleMoral Hazard vs. Land Scarcityen
dc.title.subtitleFlood Management Policies for the Real Worlden
dc.typeWorking Paperen
dc.typeDocument de travailfr
dc.typeDocumento de trabajoes
dspace.entity.typePublication
okr.crossref.titleMoral Hazard vs. Land Scarcity: Flood Management Policies for the Real World
okr.date.disclosure2019-09-13
okr.date.doiregistration2025-04-07T08:59:08.330150Z
okr.date.doiregistration2025-04-08T16:30:18.736489Z
okr.date.doiregistration2025-04-09T03:08:35.463491Z
okr.doctypePublications & Research
okr.doctypePublications & Research::Policy Research Working Paper
okr.docurlhttp://documents.worldbank.org/curated/en/523861568387904704/Moral-Hazard-vs-Land-Scarcity-Flood-Management-Policies-for-the-Real-World
okr.guid523861568387904704
okr.identifier.doi10.1596/1813-9450-9012
okr.identifier.externaldocumentum090224b0870d26cb_1_0
okr.identifier.internaldocumentum31405970
okr.identifier.reportWPS9012
okr.importedtrueen
okr.language.supporteden
okr.pdfurlhttp://documents.worldbank.org/curated/en/523861568387904704/pdf/Moral-Hazard-vs-Land-Scarcity-Flood-Management-Policies-for-the-Real-World.pdfen
okr.statistics.combined1332
okr.statistics.dr523861568387904704
okr.statistics.drstats769
okr.topicFinance and Financial Sector Development::Insurance & Risk Mitigation
okr.topicUrban Development::Hazard Risk Management
okr.topicUrban Development::Urban Economic Development
okr.topicWater Resources::Flood Control
okr.unitGlobal Facility for Disaster Reduction and Recovery
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