The political economy of natural disaster damage

May 7, 2014 | by The London School of Economics

Economic damage from natural hazards can sometimes be prevented and always mitigated. However, private individuals tend to underinvest in such measures due to problems of collective action, information asymmetry and myopic behavior. Governments, which can in principle correct these market failures, themselves face incentives to underinvest in costly disaster prevention policies and damage mitigation regulations. Yet, disaster damage varies greatly across countries. We argue that rational actors will invest more in trying to prevent and mitigate damage the larger a country's propensity to experience frequent and strong natural hazards. Accordingly, economic loss from an actually occurring disaster will be smaller the larger a country's disaster propensity – holding everything else equal, such as hazard magnitude, the country's total wealth and per capita income. At the same time, damage is not entirely preventable and smaller losses tend to be random. Disaster propensity will therefore have a larger marginal effect on larger predicted damages than on smaller ones. We employ quantile regression analysis in a global sample to test these predictions, focusing on the three disaster types causing the vast majority of damage worldwide: earthquakes, floods and tropical cyclones.

Categories: Resources: Markets in Crisis