DP16266 The Impact of Climate Change on Risk Aversion and Mitigation Behavior: Evidence from Germany

Author(s): Alexandra Avdeenko, Onur Eryilmaz
Publication Date: June 2021
Keyword(s): Life insurance, Microeconomic Behavior, Natural Disasters, risk aversion
JEL(s): D01, D03, D81, D84
Programme Areas: Public Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=16266

This paper investigates whether the 2013 floods in Germany affected risk preferences and mitigation behavior, using a representative, longitudinal data set. Exploiting the circumstance that this weather phenomenon was unanticipated, we provide robust evidence that flood exposure had a depressing impact on individual willingness to take risks. The effect size corresponds to a 4.85 percent reduction from the pre-treatment mean, varies between men and women, and is detectable up to five years after the shock. We show that this change is mediated by changes in well-being. Moreover, we discuss whether these changes in risk aversion may eventually reduce the costly moral hazard problem in climate change mitigation policies. In particular, we document that selection on risk aversion leads to a higher uptake in life insurances in high-risk areas.