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The Role of Insurance in Managing Natural Hazard Risks: Private Versus Social Decisions

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  • Dennis Epple
  • Lester B. Lave

Abstract

We explore the interaction between individual and collective decisions concerning natural hazards. Collective actions such as building a dam change the risks faced by private individuals. We show that, with proper incentives, individual reactions to such changes in risk can serve to enhance risk management by utilizing individual's decisions to take account of their specialized knowledge about their risk preferences and losses. We demonstrate that the efficient response to construction of a dam may be private actions that lead to a fully anticipated increase in flood damage. In such instances, zoning that focuses on reducing flood damage may lead to less efficient use of the flood plain. More generally, even where incentives for underinvestment in market insurance and self‐insurance are present, constraining use of the flood plain by zoning will not generally lead to efficient outcomes. The model identifying conditions under which informed individuals have the incentives to make efficient decisions is powerful and directs attention toward more fruitful approaches.

Suggested Citation

  • Dennis Epple & Lester B. Lave, 1988. "The Role of Insurance in Managing Natural Hazard Risks: Private Versus Social Decisions," Risk Analysis, John Wiley & Sons, vol. 8(3), pages 421-433, September.
    • Handle: RePEc:wly:riskan:v:8:y:1988:i:3:p:421-433
    DOI: 10.1111/j.1539-6924.1988.tb00507.x
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    References listed on IDEAS

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    1. Latimer, E.A. & Lave, L.B., 1987. "Initial effects of the New York State auto safety belt law," American Journal of Public Health, American Public Health Association, vol. 77(2), pages 183-186.
    2. Mark Pauly & Howard Kunreuther & James Vaupel, 1984. "Public protection against misperceived risks: Insights from positive political economy," Public Choice, Springer, vol. 43(1), pages 45-64, January.
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    Cited by:

    1. Tamara R. Lave & Lester B. Lave, 1991. "Public Perception of the Risks of Floods: Implications for Communication," Risk Analysis, John Wiley & Sons, vol. 11(2), pages 255-267, June.
    2. Michael R. Greenberg & Marc Weiner & Gwendolyn B. Greenberg, 2009. "Risk‐Reducing Legal Documents: Controlling Personal Health and Financial Resources," Risk Analysis, John Wiley & Sons, vol. 29(11), pages 1578-1587, November.

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