UC Berkeley

Climate change and habitat loss are at the forefront of policy discussions, but can be difficult to evaluate using an economist's toolkit because the associated damages are external to most markets. Nevertheless, there is a robust body of economics literature on climate change and on ecosystem services. This dissertation provides methodological and policy contributions to these bodies of literature; I provide a few small answers to the broad questions ``What are we are missing as economists?" and ``How can we positively influence human behavior?". I focus on two issues in particular: flooding and deforestation. These are two topics that are globally relevant and highly measurable, but difficult to study. Despite the fact that flood risk tends to be well-documented, there are many complications that affect the interpretation of flooding research. It is not always clear which homes are flooded, nor whether property sale prices should reflect true costs. It is also not clear how we can mitigate these costs or how we can help consumers make informed choices. As for deforestation, although there are excellent data on forest cover and forest loss, studying deforestation presents its own set of difficulties. Namely, the costs of deforestation are largely social costs and not private costs, and thus are not included in any market price. I present some ways in which deforestation has relatively local (within-country) effects, and so may be able to be valued in the market via government intervention. Overall, I argue that (1) there is particular complexity at the nexus of public policy, human behavior, and ecological systems, and (2) despite this fact, political and research progress can be made through careful work.

In chapter 1, co-authored with Rachel Baker, we tackle the question of how policymakers can influence human behavior, specifically in regard to floods and the property market. In most property markets, it is not clear whether homeowners and buyers understand or respond to the risk of floods; in fact, there is evidence that home buyers have difficulty understanding risk information, and forget about actual events within a few years. Although consumers may not respond to risk information, prices provide another potential signal to induce market response. In this chapter, we provide some of the first empirical estimates of whether home buyers are attentive to disaster insurance prices. We take advantage of an exogenous shock to insurance prices: a policy change that subsidizes flood insurance for high-risk homes in the UK. Using a dataset of all residential property sales in England, we find that home buyers are quite sophisticated in their response to the price of flood insurance. Homes that receive flood insurance subsidies rise in value by 9.8\%, implying full or close to full capitalization of insurance prices. Our results suggest that risk-based disaster insurance pricing can influence the housing market and promote adaptation to climate change.

In chapter 2, I examine some previously understudied impacts of deforestation, and their consequences for both policymakers and applied econometricians. Contrary to what is commonly believed among economists, there is evidence from the atmospheric science literature that local precipitation can be significantly affected by human activity. In particular, changes in forest cover in tropical regions has been found to affect precipitation by as much as a factor of two. However, these analyses do not fully account for the reverse causality issues associated with a regression of rainfall on forest cover. In this chapter, I use an instrumental variables approach to estimate the effect of exogenous changes in forest cover on rainfall, using global agricultural prices as instruments. I find that forest cover affects rainfall to a greater degree than previously estimated, and I argue that both economists and social planners need to think carefully about the unintended impacts human activity can have on all aspects of environmental services, including the local climate.

Chapter 3 of this dissertation once again explores methodological issues within economics, but this time in regards to natural disaster cost estimation, There is a rich literature that estimates the costs of and reactions to natural disasters using property sale prices. Post-disaster property sale prices reflect changes in the physical state of buildings (physical damage net repairs) as well as changes to perceived risk. These effects can work in opposite directions, as property owners may receive insurance payouts and renovate their homes before putting them on the market. In this paper, I use high-resolution flood outline data in England to examine the effects of a flood on the price of homes just inside versus just outside of a flood boundary, which should face similar changes in consumer perception of local risk. I find that homes that are sold after being flooded \textit{increase} in value relative to homes just outside a flood boundary, which indicates that the net effect of physical damage and post-flood repairs is positive. These results suggest that using post-disaster property sale prices will lead to an underestimation of the true costs of the natural disaster.