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

Worsening wildfires are one of the most salient impacts of climate change in North America. A large share of the total social costs of wildfires comes from wildland firefighting costs, which in the U.S. are largely borne by the federal government. We measure the degree to which this arrangement subsidizes development in high risk locations. To do this, we assemble administrative firefighting expenditure data from multiple 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. Our main empirical contribution is to calculate the expected additional future cost to the federal government to protect a home from wildfire, in great spatial detail for the entire western U.S. We use natural variation in ignition locations to measure how firefighting expenditures increase when homes are threatened, and then compile each home's history of fire protection costs in an actuarial calculation of expected future protection cost. We find that a large share of the resources devoted to wildland firefighting are spent to protect homes. Consistent with a model of locally non-rival firefighting benefits, the marginal effect of homes on firefighting costs is decreasing in development density. Thus, wildland firefighting represents a large implicit subsidy to landowners in high-risk, low-density places. For our highest-cost categories of homes, we find that the expected present value of additional future firefighting costs exceeds 10% of the transaction value.
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