RT Journal Article
SR Electronic
T1 Market Failure in Information: The National Flood Insurance Program
JF Land Economics
JO Land Econ
FD University of Wisconsin Press
SP 515
OP 521
DO 10.2307/3146850
VO 78
IS 4
A1 Chivers, James
A1 Flores, Nicholas E.
YR 2002
UL http://le.uwpress.org/content/78/4/515.abstract
AB The National Flood Insurance Program (NFIP) was established in 1968 and requires mandatory flood insurance for property owners who have federally backed mortgages. Krutilla (1966) noted that a compulsory national flood insurance program could greatly improve the economic efficiency of flood plain occupancy in the United States. However, in order to realize the efficiency gains suggested by Krutilla, property owners must have sufficient information about flood risk and insurance premiums to make well-informed home purchase decisions. Using survey data from Boulder, Colorado, we find significant evidence of market failure in information in the NFIP program. The majority of survey respondents, all of whom live in a special flood hazard area, report they did not fully understand the degree of flood risk or the cost of insuring against this risk when negotiating the purchase of their property. (JEL Q24)