Protections from natural disasters as local public goods: Migration and local adaptations

Abstract

We investigate a two-location local public goods economy in which agents choose their residential location and are faced with location-specific disaster risks. The majority of residents determine the amount of local public protection financed by local income tax. We assume constant relative risk aversion utility functions with basic housing consumption and show that the equilibrium allocation is sorted. When disaster risks in a location increase, population and housing prices decrease while tax rates increase, but the opposite occurs in the other one. Moreover, we evaluate policy tools, including federal aid and the inter-jurisdiction transfer. We find that in-kind transfers harm the poor in the riskier location by increasing housing prices, whereas the money transfer can be beneficial.