Monday, March 29, 2010

Hazard Mitigation

Becoming an academic is a second career for me after spending 17 years in the corporate world.  I knew little about what kind of research I would pursue.  My only inclination was that it would likely be somehow related to my corporate experience which was working in various capacities for an electric utility.  Providence was kind, however, and I was at the right place and the right time to begin a research agenda in a very new, and sparcely populated arena.  While still in grad school, I was asked if an economist can contribute anything to the issues of wind related hazards.  This invitation came from engineers, who knew little about market effects or how people may respond to risk, but not knowing any better, I jumped at the chance.  My first project is still one of favorite topics and that is the valuation of hazard mitigation.  First, what do we mean by mitigation?  Think of the story you learned as a child about the three little pigs.  One built his house out of straw, the second built his house out of sticks and the third took the time, energy and no doubt money, to build his house out of bricks.  Not surprisingly, the day comes that the big bad wolf is looking for dinner and has no trouble destroying the homes of the first two pigs.  The home of the third pig is a different story.  It was built to withstand the possibility of enduring an attack by the wolf. 

The metaphor can be applied to so many things in life but to me, it has a direct lesson for hazard mitigation.  Mitigation simply put is what you do before the hazard arrives to protect or mitigate the damage.  If you ask an engineer if he can build a home that can take anything the wolf has to dish out, most of them will answer in the affirmative.  But the economist asks if the mitigation is something that people (the market) actually want.  For many years, the assumption among professionals in natural hazards has been no.  The prevailing wisdom was that people simply ignore the potential of disaster and behave as the first 2 pigs in our story.  How can we test that hypothesis?  Simply asking people is one way but it has the disadvantage of receiving answers that may not hold up if the same people are required to purchase the mitigation.  I have been involved in several studies that look at the question a different way.  Do residential homes which contain features that mitigate against the hazards in this region, sell for a different price than homes which do not?  In other words, is there a market premium for homes which would be more like the brick home of our story?  As it turns out, the answer is yes!  We have conducted studies in markets which would be exposed to hurricanes and markets that would be exposed to tornadoes and in both cases, there is a positive and significant increase in the sales price of a home which contain features that would mitigate the damage from an eventual disaster.  This is not to say that everyone who moves into that community feels compelled to purchase mitigation.  But, enough do that it is reflected in the sales prices of real estate in those communities.

This has quite a bit to say about public policy in dealing with natural hazards.  If you really believe that people are not going to do what is best to protect them from the hazard, the only option to protect the public is to undertake policies which require or force them to do so.  But, if there is a market for mitigation, the options for policy makers are increased rather dramatically.  Now, we can entertain the idea of providing market incentives which would be voluntary.  In other words, we can nudge the market rather than replacing it. 

My time in Norway has so far been a wonderful experience.  Last week I presented some of my research on tornadoes to the Norwegian School for Life Sciences.  This week I travel to Brussels to meet with the staff at the Centre for Research in the Epidemiology of Disasters.  They maintain a large database, EM-DAT, on disasters which is used by researchers all over the world.

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