Moving to Lower Ground: National Flood Insurance Program Subsidies and Floodplain Development
Federal disaster aid such as subsidized flood insurance can potentially increase the value of the asset base at risk by encouraging development in flood-prone regions. The conceptual basis for this argument is well established, but there has been relatively little empirical work examining the consequences of government disaster aid on the location of local economic activity. Coastal populations have increased dramatically in the past half century, as have the costs of flood damages. This paper investigates to what extent subsidized insurance premiums offered by the National Flood Insurance Policy (NFIP) have contributed to this rise by directly encouraging residential and commercial development in flood-prone regions. Using fine-scale land cover data spanning five dates between 1973 and 2000, cross-sectional variation in the length of time communities were eligible for subsidized rates is used to estimate the effect of NFIP subsidies on both short-term and long-term development within floodplains along the Gulf and Atlantic Coasts. Preliminary results reveal that an extra year of NFIP subsidy availability for a community corresponds to a sustained increase in the probability of floodplain development in that community by 0.1-1.0 percentage points. This effects survives through the 1990’s but dissipates by the year 2000.