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Optimal wildfire insurance in the wildland-urban interface in the presence of a government subsidy for fire risk mitigation

Author

Listed:
  • Mariam Lankoande
  • Jonathan Yoder
  • Philip Wandschneider

    () (School of Economic Sciences, Washington State University)

Abstract

We investigate the effectiveness of a government subsidy and mitigation based insurance contracts at discouraging migration into the wildland interface and at inducing incentives for risk mitigation. We construct a model of the individual migration decision, where the individual maximizes expected utility defined over attributes of locations including cost of insurance and mitigation, wildfire damage, and the availability of a subsidy for reducing wildfire risks through fuel management. Our analysis shows that standard insurance policies provide inefficiently weak incentive for wildfire risk mitigation by offering a low insurance premium to high-risk landowners. We find on the other hand that in the presence of optimal government subsidy, contingent contracts provide an efficient solution where a homeowner chooses a mitigation level that maximizes social benefit and insurers provide actuarially fair contracts such that each individual is offered a premium of the exact value of her wildfire risk.

Suggested Citation

  • Mariam Lankoande & Jonathan Yoder & Philip Wandschneider, 2005. "Optimal wildfire insurance in the wildland-urban interface in the presence of a government subsidy for fire risk mitigation," Working Papers 2005-9, School of Economic Sciences, Washington State University.
  • Handle: RePEc:wsu:wpaper:yoder-9
    as

    Download full text from publisher

    File URL: http://faculty.ses.wsu.edu/WorkingPapers/Yoder/LankoandeEtAl_InsuranceSubsidiesWildfire_2005.pdf
    File Function: First version, 2005
    Download Restriction: no

    Citations

    Blog mentions

    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. The West is on fire – and the US taxpayer is subsidizing it
      by John Rennie Short, Professor, School of Public Policy, University of Maryland, Baltimore County in The Conversation on 2015-09-23 14:36:34

    Citations

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    Cited by:

    1. Barreal, Jesús & Loureiro, Maria L. & Picos, Juan, 2014. "On insurance as a tool for securing forest restoration after wildfires," Forest Policy and Economics, Elsevier, vol. 42(C), pages 15-23.

    More about this item

    Keywords

    Insurance; Insurance Companies; Government Policy and Regulation; General; Government Policy;

    JEL classification:

    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • Q20 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation - - - General
    • Q28 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation - - - Government Policy

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