The hedonic pricing approach is used to examine whether homeowners and/or renters alter their subjective assessments of earthquake risks after massive earthquakes. Using nation-wide household panel data coupled with earthquake hazard information and records of observed earthquakes, we find that there are some modifications of individuals' assessments of earthquake risk in both cases. We have carefully taken into consideration the bias stemming from the use of objective risk variables as a proxy for individual risk assessments. Our results suggest that the price discount from locating within a quake-prone area is significantly larger soon after earthquake events than beforehand. We argue that the most likely interpretation for this result is that households tend to underestimate earthquake risk if there has not been a recent occurrence. AbstractThe hedonic pricing approach is used to examine whether homeowners and/or renters alter their subjective assessments of earthquake risks after massive earthquakes. Using nation-wide household panel data coupled with earthquake hazard information and records of observed earthquakes, we find that there are some modifications of individuals' assessments of earthquake risk in both cases. We have carefully taken into consideration the bias stemming from the use of objective risk variables as a proxy for individual risk assessments. Our results suggest that the price discount from locating within a quake-prone area is significantly larger soon after earthquake events than beforehand. We argue that the most likely interpretation for this result is that households tend to underestimate earthquake risk if there has not been a recent occurrence.JEL classification: R20, C23.
Abstr actThe Great East Japan Earthquake and subsequent tsunami on March 11 were a reminder of Japan's huge earthquake risk and need for preparedness. The northeastern part of the country witnessed devastating human suffering and physical damage. The destructive impact of the earthquake has enhanced consumer's earthquake preparedness even in unaffected areas. This paper uses unique survey data collected after the earthquake to study how consumers reacted to this catastrophic event. We find that self-reported, perceived preparedness for natural disasters has significantly improved even among low-income households after March 11, but that post-quake intentions for more specific risk mitigation activities were systematically associated with household income and wealth levels. High income households are more likely to plan purchase of earthquake insurance or to conduct seismic retrofitting following the March 11th earthquake, indicating that the recent events might have widened the gap in disaster preparedness between rich and poor.
A theoretical framework and empirical evidence are presented to show the connection between community uniform rating and cross-subsidies in earthquake insurance policy in Japan.Cross-subsidies are defined as the difference between a fair actuarial premium and the community uniform rate. The estimation result shows that the uniform community rating may unintentionally cross-subsidize inhabitants in high risk areas at the expense of inhabitants in low risk areas. Our simulation results indicate that replacing the current community rating with the fair actuarial premium would increase the overall subscription rate for earthquake insurance by about 3.7 percentage point, and that the increase is particularly prominent in relatively less risky areas. We propose modifying the Japanese earthquake insurance system by adopting a more refined risk rating system that more closely reflects regional differences in earthquake risk. AbstractA theoretical framework and empirical evidence are presented to show the connection between community uniform rating and cross-subsidies in earthquake insurance policy in Japan. Cross-subsidies are defined as the difference between a fair actuarial premium and the community uniform rate. The estimation result shows that the uniform community rating may unintentionally cross-subsidize inhabitants in high risk areas at the expense of inhabitants in low risk areas. Our simulation results indicate that replacing the current community rating with the fair actuarial premium would increase the overall subscription rate for earthquake insurance by about 3.7 percentage point, and that the increase is particularly prominent in relatively less risky areas. We propose modifying the Japanese earthquake insurance system by adopting a more refined risk rating system that more closely reflects regional differences in earthquake risk.JEL classification: D81, G22, G28, R10.
The effect of unemployment risk on the timing of homeownership is examined through the use of a retrospective panel of Japanese households. We obtain the following results by applying the split population duration (SPD) model: (1) unemployment risk, as proxied by the probability of unemployment, has a significantly negative effect on homeownership and delays its timing, (2) the effect of unemployment risk is overestimated in previous studies, which assume that all households will eventually become homeowners, and (3) household characteristics as well as the conditions of housing and labour markets at the early stages of a household's life cycle play an important role in the determination of its housing purchase.Finally, our simulation results indicate that an initial one-year unemployment spell will have a fairly large impact of 1.6-year delay in the timing of a subsequent home purchase. AbstractThe effect of unemployment risk on the timing of homeownership is examined through the use of a retrospective panel of Japanese households. We obtain the following results by applying the split population duration (SPD) model: (1) unemployment risk, as proxied by the probability of unemployment, has a significantly negative effect on homeownership and delays its timing, (2) the effect of unemployment risk is overestimated in previous studies, which assume that all households will eventually become homeowners, and (3) household characteristics as well as the conditions of housing and labour markets at the early stages of a household's life cycle play an important role in the determination of its housing purchase. Finally, our simulation results indicate that an initial one-year unemployment spell will have a fairly large impact of 1.6-year delay in the timing of a subsequent home purchase.JEL classification: R21, J64
Japan is famous for its earthquakes. How do households and firms respond to this potentially devastating risk? How does earthquake risk affect housing costs and wages? To answer these questions, we construct a Quality of Life Index (QOLI) and estimate the social cost of earthquake risk among cities/counties in Japan. The regional QOLI is obtained through estimating the hedonic wage and housing rent regressions using household longitudinal data covering all Japan. From the estimated results, we find that earthquake risk has a significant impact on the overall quality of life in Japanese prefectures, and that there are large city/county differences in terms of the social cost of earthquake risk. Finally, we argue that the large regional variation in the social cost of earthquakes arises from earthquake insurance market imperfections -crude and rough geographical risk rating -and propose a possible remedy for enhancing earthquake insurance risk assessment.
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