Natural Disasters and Governmental Aid: Is there a Charity Hazard?

Abstract

In the aftermath of natural disasters, governments frequently provide financial aid for affected households. This policy can have adverse effects if individuals anticipate it and forgo private precaution measures. While theoretical literature unequivocally suggests this so called "charity hazard", empirical studies yield ambiguous results. Drawing on rich survey data from German homeowners, we analyze charity hazard for different flood precaution strategies and different flood risk areas. Our results indicate a substantial charity hazard in the insurance market for individuals residing in floodprone areas. In contrast, we find a positive correlation between governmental aid and non-financial protection measures. Moreover, our results suggest that insurance and non-financial protection measures are rather complements than substitutes. Finally, we provide suggestive evidence that status-quo bias might play an important role for insurance uptake.

Risk Perceptions and Flood Insurance: Insights from Homeowners on the Georgia Coast

“…For example, mandatory flood insurance requirements are often circumvented [7]. Individuals have also been shown to forgo insurance when expectations of government ex-post disaster aid are high [8] and to reduce insurance coverage in response to distribution of aid [9][10][11]. These are some of the contributing factors that explain why only 30 percent of U.S. homeowners in 100-year flood zones have flood insurance [12].…”

Improving the economic sustainability of Italian Farmer: an Empirical Analysis of decision-making models for insurance adoption.

“…There is a positive and significant relationship between Number of Certificates and Reimbursed Value and Farmers' Net Income and particularly an increase of 1% in the Farmers' Net Income generates a positive variation around 0.25% in the Number of Certificates. Furthermore, the analysis shows a close negative relationship between Total Subsidies and Number of Certificates variables and this result suggests that in the Italian agricultural system there exists the charity hazard phenomenon (Andor et al, 2020;Miglietta et al, 2020).…”

“…(2) The charity hazard phenomenon exists in the Italian Agricultural Insurance system, an increase in the subsidies is not a valid instrument to face the agricultural insurance diffusion problem (Andor et al, 2020;Miglietta et al, 2020).…”

Green-SÖP: The Socio-ecological Panel Survey: 2012–2016

“…Federal Statistical Office (a) (cns), Green-SÖP (a, b, c, a, b), own calculation. Andor et al (2020) analyze information on private flood precaution strategies of homeowners and contrast respondents from flood exposed and non-exposed regions. They detect a charity hazard, a variant of moral hazard, as homeowners tend to rely on charity and governmental aid rather than installing precaution and buying insurances.…”