UC Davis

Climate change is significantly amplifying the frequency and intensity of natural disasters, transforming them from sporadic events into persistent crises. Extreme heat, hurricanes, tornadoes, wildfires, floods, droughts, and other disasters are not only more common but also more devastating, leading to destruction of ecosystems, human casualties, and substantial economic losses. By analyzing past responses and predicting future trends, economists can help policymakers develop strategies that not only mitigate the financial toll of natural disasters but also enhance the resilience of vulnerable populations. This dissertation explores the intricate dynamics between natural disasters, insurance markets, and climate change, focusing on the state of California. It is structured into three chapters, each examining a distinct aspect of how risk and regulatory responses shape economic behavior and market outcomes in the context of increasing environmental volatility.

Chapter 1 investigates the influence of natural disaster risk on migration decisions and demographic sorting based on income and risk preferences, focusing on individual responses to a changing climate. One of the most effective ways to reduce individual exposure to natural disaster risk is to migrate away from risky areas. However, as people migrate away from risk, an opportunity opens for other people to migrate towards it. I study who chooses to move in both directions in rural California, which has experienced a rapid escalation of wildfire risk in recent years. Utilizing a novel measure of wildfire risk derived from California's residual homeowners insurance market, I distinguish the impacts of wildfire risk from other unobserved variables. The analysis reveals that increased wildfire risk prompts a population reshuffling, with lower-income and less risk-averse individuals more likely to migrate into high-risk areas. These findings have significant policy implications, highlighting the challenges of disaster preparedness and recovery among vulnerable populations.

Chapter 2 examines the consequences of regulatory interventions for firms in the disaster insurance market amid escalating climate risks. In California, increasing risk of wildfire is fueling an insurance crisis; in May 2023, the largest and fourth largest insurance firms (State Farm and Allstate) suspended all new underwriting activity related to homes and businesses citing increasing wildfire risk. In response, the government implemented a moratorium on insurance non-renewals in zip codes that experience an emergency wildfire for one year following the emergency declaration in an attempt to protect customers and reduce reliance on the insurer of last resort. I present a theoretical model of this adversely selected market with an insurer of last resort and empirically evaluate the non-renewal moratoriums. Through a difference-in-differences methodology, I find that while the moratoriums temporarily reduced insurer-initiated non-renewals, their effects were short-lived, and there was no significant impact on participation in the state's insurer of last resort. These results highlight the limitations of regulatory measures in maintaining market stability under severe climate pressures.

Chapter 3 explores the role of government in facilitating climate change adaptation in California's groundwater and surface water markets. Climate models project that in California, droughts and floods will become more frequent and severe and year to year variability in precipitation will increase. In places where water rights have been established, water markets play a critical role in allocating water over space and can smooth climate risk by redistributing water to users that value it the most. While efforts have been made to improve water trading across space, market design has paid relatively less attention to the question of when scarce water resources should be allocated. This chapter examines the effect of water storage constraints on price dynamics in California's surface and groundwater markets, using transactions level water transfer data from 2010 to 2022. I examine recent market activity, including trading volumes and locations, and analyze the spatial and temporal variability in water prices. I find that surface water markets exhibit significant price fluctuations tied to precipitation changes due to limited storage capacity, whereas groundwater markets maintain stable prices, unaffected by such variability. These findings highlight the potential for conjunctive management of surface and groundwater to stabilize water prices and enhance economic welfare by leveraging California's substantial groundwater storage capacity. This study emphasizes the importance of integrated water management strategies to mitigate the economic impacts of climate change on water resources.

Collectively, this dissertation provides critical insights into the economic and policy challenges posed by natural disasters and climate change, emphasizing the need for adaptive strategies to manage risk and support vulnerable populations.