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Learning about an Infrequent Event: Evidence from Flood Insurance Take-Up in the United States

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  • Justin Gallagher

Abstract

I examine the learning process that economic agents use to update their expectation of an uncertain and infrequently observed event. I use a new nation-wide panel dataset of large regional floods and flood insurance policies to show that insurance take-up spikes the year after a flood and then steadily declines to baseline. Residents in nonflooded communities in the same television media market increase take-up at one-third the rate of flooded communities. I find that insurance take-up is most consistent with a Bayesian learning model that allows for forgetting or incomplete information about past floods.

Suggested Citation

  • Justin Gallagher, 2014. "Learning about an Infrequent Event: Evidence from Flood Insurance Take-Up in the United States," American Economic Journal: Applied Economics, American Economic Association, vol. 6(3), pages 206-233, July.
    • Handle: RePEc:aea:aejapp:v:6:y:2014:i:3:p:206-33
    Note: DOI: 10.1257/app.6.3.206
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    References listed on IDEAS

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    More about this item

    JEL classification:

    • D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming

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