Irrational Economist_ Making Decisions in a Dangerous World - Erwann Michel-Kerjan [75]
WHY WAS NEW ORLEANS, STILL HIGHLY EXPOSED TO FUTURE HURRICANES, REBUILT IN THE SAME PLACE?
A salient societal issue raised by these decision errors and the resulting market failure is determination of the appropriate role for government. After Hurricane Katrina in August 2005, the government initially fell short in its response but subsequently has spent billions to compensate the victims and increase the protections against future flood risks. Many economists debated the wisdom of rebuilding New Orleans and strengthening the protections against future flooding given the inherent riskiness of the Gulf Coast region. Such musings may have academic interest but are of little practical consequence: The city is being rebuilt. A well-established finding in behavioral economics is the “endowment effect,” whereby people place an inordinately large value on assets in their possession. New Orleans itself might be viewed as one such asset that we collectively possess, as it ranks among the most important cities in the United States in terms of historical and architectural interest. Individual property values there certainly understate the worth of New Orleans to the country. So, politically, any plan of action that does not ensure the survival of New Orleans is simply a nonstarter.
THE HOLD-UP PROBLEM
There are additional difficult policy issues pertaining to disaster assistance. What, for example, is the appropriate future compensation policy given that the presence of hurricane risks to New Orleans is well known? If residents return to New Orleans and suffer from a future hurricane, should the government again provide substantial compensation for the losses incurred? A national survey undertaken in April 2006—eight months after Hurricane Katrina—found that a representative national sample expressed little support for additional aid. Specifically, whereas 82 percent of the American public supported compensation of disaster victims generally, only 36 percent supported compensation of victims in New Orleans after the next hurricane.4 Saying that one will not support assistance after a future hurricane may, of course, be a form of hypothetical trash talk. It is a very different matter to actually deny assistance once there are identified victims and their stories are featured on the evening news. In health-risk contexts, the sentiments people express about saving the identified lives of people who will otherwise die if there is no intervention are quite different from the valuations involved in reducing small probabilities of death within a large population, where the persons who will be saved are not known in advance. In much the same way, aiding those actually in need will be a more pressing concern than aiding those who may prospectively be in need.
As a society, then, we are faced with a hold-up problem. People may under-insure despite the offer of subsidized insurance and then seek and obtain post-disaster assistance, which is difficult to deny. The analytic phenomenon is not unlike that posed by aid to the elderly in the United States. If people did not save for retirement, there would be millions of destitute elderly who would be prime candidates for government assistance. Denying such aid would be difficult. To avoid these enormous aid costs, the government requires savings for retirement through Social Security. For those who do not have sufficient earnings to reap these retirement benefits, the Supplemental Security Income program provides assistance.
POLICIES TO FOSTER ADEQUATE SELF-PROTECTION AND INSURANCE
Cognizant of the failure of people to buy adequate disaster insurance coupled with the U.S. government’s inability to deny post-disaster aid, Howard Kunreuther and Mark Pauly have proposed a comprehensive approach for disaster risks to deal with the possible consequences of disasters in a more anticipatory manner.5 Under their proposal, the government would impose