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Market Failure in Information: The National Flood Insurance Program

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  • James Chivers
  • Nicholas E. Flores

Abstract

The National Flood Insurance Program (NFIP) was established in 1968 and requires mandatory flood insurance for property owners who have federally backed mortgages. Krutilla (1966) noted that a compulsory national flood insurance program could greatly improve the economic efficiency of flood plain occupancy in the United States. However, in order to realize the efficiency gains suggested by Krutilla, property owners must have sufficient information about flood risk and insurance premiums to make well-informed home purchase decisions. Using survey data from Boulder, Colorado, we find significant evidence of market failure in information in the NFIP program. The majority of survey respondents, all of whom live in a special flood hazard area, report they did not fully understand the degree of flood risk or the cost of insuring against this risk when negotiating the purchase of their property.

Suggested Citation

  • James Chivers & Nicholas E. Flores, 2002. "Market Failure in Information: The National Flood Insurance Program," Land Economics, University of Wisconsin Press, vol. 78(4), pages 515-521.
    • Handle: RePEc:uwp:landec:v:78:y:2002:i:4:p:515-521
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    References listed on IDEAS

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    1. Colin F. Camerer & Howard Kunreuther, 1989. "Decision processes for low probability events: Policy implications," Journal of Policy Analysis and Management, John Wiley & Sons, Ltd., vol. 8(4), pages 565-592.
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    More about this item

    JEL classification:

    • Q24 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation - - - Land

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