The Effect of Natural Disasters and Extreme Weather on Household Location Choice and Economic Welfare

Abstract

Natural disasters have increased in the United States in recent decades. At the same time, there has been a shift in population away from the states in the Northeast and Midwest to areas in the Sun Belt, many of which face increased risks from natural disasters. Spatial equilibrium theory predicts that households trade off risk for income in making location decisions. This study estimates a spatial equilibrium model of household location choice to understand these trade-offs. The results show that households require as much as 0.40% of annual household income to endure an additional disaster over the course of a decade. They also show that these values differ substantially depending on household skill level with higher-skill, higher-income households willing to pay three times more in annual income to avoid an additional natural disaster. These results have important implications for policymakers thinking about climate change adaptation and environmental justice.

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