Effects of Information on Risk Perception: Empirical Evidence from the Housing Market in Taiwan

Abstract

This research uses a difference-in-differences framework to investigate the effect of new risk information on housing prices in Taiwan. The results show that this information changed individuals' subjective risk perceptions, so that housing prices in the highest-risk areas dropped, but only temporarily in the first three months after the disclosure. Also, this information effect happened for those apartments lacking certain earthquake-resistant characteristics, while there was no effect for the apartments with such characteristics. In addition, we investigate the dynamics of the effect around the boundary. We demonstrate that individuals can form continuous risk beliefs based on discrete information, as the housing prices dropped more sharply for those apartments located closer to the center of the risk area. Furthermore, individuals updated their risk beliefs differently for apartments with different earthquake resistance qualities. For those apartments lacking such qualities, the immediate price drops were relative larger, and the housing prices returned to normal more slowly, relative to the apartments with such qualities, thus considered "safer". The effect did not disappear at all for those apartments lacking earthquake-resistance that were also located in the center of the risk area.