"Coping with Damages caused by the Great Hanshin-Awaji Earthquake"(in Japanese)

Applying the ordered probit model to household data, we investigate people's behavior against unexpected losses caused by the Great Hanshin-Awaji (Kobe) earthquake in 1995. We found that credit market played an important role in providing an effective risk-coping measure. In the process of preparing well-designed social safety nets against future natural disasters, there exist two policy implications based on our analyses: first, in its attempt to provide ex post public support in the event of a natural disaster, the government may create a moral hazard problem by encouraging people to expose themselves to greater risks than required. Our empirical results suggest that providing subsidized loans to victims can be a good example of facilitating risk-coping behavior; such interventions are less likely to create serious moral hazard problems. Second, it would be imperative to design ex ante risk-management policies against the earthquake. For example, development of markets for earthquake insurance would lead to the efficient pricing of insurance premium and efficient land market prices reflective of the amount of risk involved with lands. This development would generate proper incentives to invest in mitigations such as investments in earthquake-proof constructions against future earthquakes. These ex ante measures would significantly reduce the overall social loss caused by the earthquake.