Sorting Over Wildfire Hazard

The costs of natural disasters in the United States have increased in recent years, and, among disaster types, losses to wildfires have risen most sharply. The distribution of costs across households depends, in part, on household incomes and relative willingness to accept (WTA) wildfire risk. Studies have shown that households living in high wildfire hazard areas have higher incomes on average, but this could change with changes in risks, market environments (e.g., insurance), and regulation. In this paper, we use a discrete choice residential sorting model to study relative WTA wildfire hazard among households with different levels of income and wildfire experience. A spatial discontinuity in California’s natural hazard disclosure laws allows us to distinguish aversion to hazard, when it is made salient to buyers at the time of purchase, from preferences toward correlated amenities, such as forest cover. We have three core findings. First, regulatory disclosure matters. In areas where disclosure is required, households are averse to fire hazard. Second, aversion is increasing in income, which suggests that lower-income households may replace high-income households in high-hazard areas, raising concerns about distributional justice. Finally, individual experience with wildfire events does not increase aversion to hazard, suggesting that experience is not a replacement for disclosure in motivating informed decision-making.