The Effects of Natural Disasters and Extreme Weather on Household Location Choice and Economic Welfare
Climate models anticipate a rise in the frequency and intensity of natural disasters. Concurrently, the U.S. has witnessed substantial population growth in the Sun Belt over recent decades, with households moving from the Northeast and Midwest to Southern states, many of which are prone to ongoing and future natural disasters and extreme heat. A comprehensive analysis of billion-dollar events in the U.S. indicates that the South/Central and Southeast regions bear the highest frequency and cumulative damage from disasters. We examine the necessary income adjustments to compensate for living in areas with a higher risk of natural disasters, comparing this compensation to values associated with other environmental risks and considering variations by disaster type and household characteristics. We combine data on large-scale natural disasters (Federal Emergency Management Agency data on Presidential Disaster Declarations, 1981-2010) and extreme weather (PRISM Climate Group) and data on household location choices and economic outcomes (the U.S. decennial census 1990 and 2000 and the American Community Survey 2010-2014) and estimate a spatial equilibrium model to understand the long-run welfare implications of household sorting in the face of disasters and extreme weather.
We demonstrate that household sorting to riskier locations is not an indication of indifference toward risk but rather an equilibrium outcome, where higher real incomes compensate for increased risk from natural disasters. Using baseline marginal utility estimates and household income data, we derive marginal willingness to pay (MWTP) values. For disasters, households are willing to pay $192 annually to avoid an extra disaster over a decade, equivalent to 0.40% of real household income. Additionally, our findings reveal significant variations in these values based on household skill levels, indicating that higher-skill, higher-income households are willing to pay three times more in annual income to avoid an additional natural disaster. These findings hold policy implications, suggesting households are partially informed about natural disaster risks in their location choices, necessitating wage increases or rent reductions as compensation for expected damages—a crucial consideration for policymakers addressing climate change adaptation strategies.
Natural disasters have increased in the U.S. in recent decades. At the same time, there has been a shift in population away from the states in the Northeast and Midwest to areas in the Sunbelt, many of which face increased risks from natural disasters. Spatial equilibrium theory predicts that households trade off risk for income in making location decisions. We estimate a spatial equilibrium model of household location choice to understand these trade-offs. Our results show that households require as much as 0.40% of annual household income to endure an additional disaster over the course of a decade. We also show that these values differ substantially depending on household skill level with higher-skill, higher-income households willing to pay three times more in annual income to avoid an additional natural disaster. Our results have important implications for policymakers thinking about climate change adaptation and environmental justice.