Research‎ > ‎

Moral Hazard, Wildfires, and the Economic Incidence of Natural Disasters

Increased wildfire risk is one of the most salient impacts of climate change in North America.  As is the case for many other impacts of climate change, adaptive responses to worsening wildfires include large government investments. These growing public expenditures raise classic public economics questions about moral hazard, distributional impacts, and allocative efficiency.  We consider these questions in the context of wildland firefighting expenditures in the United States, which are now several billion dollars per year and are incurred almost entirely by the federal government. We assemble administrative firefighting expenditure data from five federal and state agencies, yielding the most comprehensive database of firefighting costs in existence. We merge this to parcel-level data on the universe of western U.S. homes.  We make two main contributions.  First, we measure the share of firefighting expenditures that are dedicated to protecting private homes. To do this, we take advantage of natural variation in ignition locations to measure the causal impact of private home presence and density on firefighting costs. Next, we use our data and estimates to calculate parcel-level implicit transfers via firefighting for the entire western U.S. We find that firefighting expenditures are overwhelmingly driven by efforts to protect homes. Wildland firefighting represents a large transfer of federal revenues to landowners in high-risk, low-density places. For the highest-cost categories of homes, we find that the expected present value of firefighting costs exceeds 10% of the transaction value. Costs are strongly non-linear in the number of homes threatened, meaning housing density influences per-home protection costs. We evaluate the moral hazard implications of this implicit subsidy through a back-of-the-envelope exercise using price elasticities for new residential construction.