Moral Hazard vs. Land Scarcity: Flood Management Policies for the Real World

Abstract

The Policy Research Working Paper Series disseminates the findings of work in progress to encourage the exchange of ideas about development issues. An objective of the series is to get the findings out quickly, even if the presentations are less than fully polished. The papers carry the names of the authors and should be cited accordingly. The findings, interpretations, and conclusions expressed in this paper are entirely those of the authors. They do not necessarily represent the views of the International Bank for Reconstruction and Development/World Bank and its affiliated organizations, or those of the Executive Directors of the World Bank or the governments they represent.

Flood Protection and Land Value Creation — not All Resilience Investments are Created Equal

“…Second, aggregate land values are unaffected by floods when these are distributed homogeneously throughout the urban area (a, b) or proportionally to the distance to the city center (c, d). This result is consistent with Avner and Hallegatte (2019), that show, with Cobb-Douglas functions, that higher structure depreciation rates caused by the costs of floods (or risk-based insurance) lead to a decrease in built housing surface that is exactly compensated by higher rents, leaving landowners' profits unaffected.…”

“…Open Cities Absentee Landowners In closed cities (CCA and CCP), two results, already reported in Avner and Hallegatte (2019), are noteworthy. First, household utility is decreased by a factor 1 <1, compared to a 'no-flood' situation, translating the fact that reduced housing supply will increase unitary housing rents and lower housing consumption, all else equal.…”

“…When flood prone areas are distributed proportionally to the distance from the city center (configurations a) to d) in Figure 1), it is possible to show analytically, using Cobb-Douglas functions and building on Avner and Hallegatte (2019), how household utility ( ), aggregate land values ( ) and city populations ( ) are affected by floods compared to a no-flood situation in all four polar city configurations (CCA, CCP, OCA and OCP).…”

Flood Protection and Land Value Creation – Not all Resilience Investments Are Created Equal

“…In closed cities (CCA and CCP), two results, already reported in Avner and Hallegatte (2019), are noteworthy. First, household utility is decreased by a factor 𝐶𝐶 𝑓𝑓 1 𝛾𝛾 <1, compared to a 'no-flood' situation, translating the fact that reduced housing supply will increase unitary housing rents and lower housing consumption, all else equal.…”

“…When flood prone areas are distributed proportionally to the distance from the city center (configurations a) to d) in Figure 1), it is possible to show analytically, using Cobb-Douglas functions and building on Avner and Hallegatte (2019), how household utility (𝑢𝑢), aggregate land values (𝐴𝐴𝐿𝐿𝐴𝐴) and city populations (𝑁𝑁) are affected by floods compared to a no-flood situation in all four polar city configurations (CCA, CCP, OCA and OCP).…”