Flood Hazard Pricing and Insurance Premium Differentials: Evidence from the Housing Market

In this article, a model is developed of the rational consumer's willingness to pay for a marginal reduction in the probability of an undesirable state (flooding) occurring in the residential location decision. The model incorporates a hedonic price gradient for low-probability, high-loss flood hazards. Individuals can self-insure against flooding hazards by locating in residential areas where the probability of flooding hazard is relatively low and, all other things equal, consumers should pay more for houses located in relatively less hazardous areas. A relationship between housing price differentials and insurance premiums for housing located inside and outside of a hazard zone is developed, as well as tests for noninsurable costs.