Social Interactions and Households' Flood Insurance Decisions
62 Pages Posted: 18 Feb 2021 Last revised: 16 Feb 2022
Date Written: January 15, 2022
Abstract
Flooding is the most costly natural disaster faced by US households, yet policymakers are puzzled by the low take-up rates for flood insurance. Leveraging novel transaction-level data, this paper studies the influence of social interactions on households' insurance decisions. I show that households increase flood insurance purchases by 1-5 percent when their geographically distant friends are exposed to flooding events or to campaigns for flood insurance. These exogenous shocks to far-away friends should not affect local households' own insurance decisions except through peer effects. I provide evidence suggesting that social interactions facilitate learning through information dissemination and attention triggering.
Keywords: Household Finance, Peer Effects, Social Interactions, Flood Insurance, Climate Risk
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