Moral hazard, wildfires, and the economic incidence of natural disasters

This paper measures the degree to which large government expenditures on wildland fire protection subsidize development in high risk locations. A substantial share of the total social costs of wildfires comes from federal firefighting efforts that prevent or reduce property loss.

The paper assembles administrative data from multiple state and federal agencies to calculate the expected cost to the government of protecting at-risk homes from wildfire, in great spatial detail and for the entire western United States. To do so, it first measures the causal impact on firefighting costs when homes are built in harm’s way. It then adds up historical protection expenditures incurred on behalf of each home and calculate an actuarial measure of expected future cost. This measure is increasing in fire risk and surprisingly steeply decreasing in development density. In high-cost areas, the expected present value of fire protection exceeds 10% of a home’s transaction value. The paper considers the potential for these subsidies to distort location choice, development density, and private investments in risk reduction.