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Public compensation for windstorm damage reduces incentives for risk management investments

Author

Listed:
  • Marielle Brunette

    (BETA - Bureau d'Économie Théorique et Appliquée - INRA - Institut National de la Recherche Agronomique - UNISTRA - Université de Strasbourg - UL - Université de Lorraine - CNRS - Centre National de la Recherche Scientifique, LEF - Laboratoire d'Economie Forestière - ENGREF - Ecole Nationale du Génie Rural, des Eaux et des Forêts - INRA - Institut National de la Recherche Agronomique)

  • Stéphane Couture

    (LEF - Laboratoire d'Economie Forestière - ENGREF - Ecole Nationale du Génie Rural, des Eaux et des Forêts - INRA - Institut National de la Recherche Agronomique)

Abstract

Governments of some European countries compensate landowners for windstorm damage to forests. We analyze the impact of such programmes on non-industrial private forest owner decisions to purchase an insurance policy for windstorm coverage and other natural events and/or invest in risk-reducing forest management activities. We develop a theoretical model to predict demand for an insurance policy or risk-reducing forest management activity, and improve upon previous efforts by varying the damage losses proportional to timber stand value. We characterize the comparative static effects on risk management investments of variations in the price of insurance, landowner risk attitude, timber stand value, and presence or absence of public compensation. Then we discuss public policy implications and analyze some alternative approaches. We conclude that providing public financial assistance to non-industrial private forest owners after damage-causing events may reduce their incentive to purchase insurance or invest in protective forest management activities.

Suggested Citation

  • Marielle Brunette & Stéphane Couture, 2008. "Public compensation for windstorm damage reduces incentives for risk management investments," Post-Print hal-00278718, HAL.
    • Handle: RePEc:hal:journl:hal-00278718
    DOI: 10.1016/j.forpol.2008.05.001
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