Risk Preferences and Flood Insurance

Abstract

A detailed theoretical model characterizing the individual's decision to purchase flood insurance is specified and the magnitude of the risk parameter is estimated using data based on transactions of flood insurance purchases. Empirical results for several samples of this subset of the general population indicated that consumers exhibited a relatively uniform degree of risk aversion across various localities where different hydrologic and economic conditions prevailed. While the estimates presented should not be directly extrapolated to the entire population located in a flood prone area, they provide evidence that parameters determining an individual's and/or community's willingness to pay for flood protection can be measured.