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Essays on Climate Risk
Lee, Jiyoung
Lee, Jiyoung
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Date
2025-08
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Business Administration/Risk Management and Insurance
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Lee_temple_0225E_16274.pdf
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https://doi.org/10.34944/98b7-nj17
Abstract
This dissertation examines how individuals adapt to climate-related risks, with a focus on the financial decisions they make in response to uncertain and evolving climate risks. As climate risks intensify, much of the burden of adaptation falls on households. However, the tools available to them, such as insurance and preventive investments, require navigating complex information and cost structures. This work explores how households respond to changes in pricing, interpret new and sometimes conflicting sources of risk information, and make forward-looking decisions that involve balancing multiple, distinct risks. Together, the three essays highlight the challenges of household-level climate adaptation and offer insights into how policy design and information provision can better support individual decision-making.
The first essay evaluates the impact of a risk-based pricing reform implemented by the National Flood Insurance Program (NFIP), which aimed to align premiums more closely with property-level flood risk. Using a difference-in-differences research design, this study estimates the changes in flood insurance demand following the reform. We find that a 10 percent increase in premiums leads to an average 2 percent decline in insurance take-up. The response is more pronounced among existing policyholders outside Federal Emergency Management Agency (FEMA)-designated high-risk areas. This finding indicates that homeowners are less likely to renew their insurance policies after a premium increase, unless required to do so. Consequently, many homeowners may fail to fully recognize the increasing flood risk of their properties, as reflected in their new premium adjustments. This gap in risk perception may contribute to lower insurance take-up, particularly among those not subject to mandatory purchase requirements. The findings underscore the need for clearer communication and transparency in climate risk information to support more informed insurance decisions.
The second essay investigates how households respond to newly disclosed flood risk information. In 2020, the First Street Foundation (FSF), a nonprofit climate risk research group, publicly released its property-level flood risk data, offering a more detailed and dynamic assessment than the existing FEMA flood maps, which had long served as the primary source of flood risk information for homeowners. Notably, FSF and FEMA often identified different areas as high risk. The FSF data gained broad public visibility through national news coverage and integration with major real estate platforms. This essay leverages the discrepancies between FSF and FEMA risk classifications to estimate how conflicting risk signals influence insurance demand. The results show that take-up rates increased in areas where FSF assessed higher risk than FEMA, and decreased where FEMA assessed higher risk than FSF. These effects are driven primarily by changes in policy renewals rather than new purchases. The findings highlight how households incorporate new sources of risk information and emphasize the role of credibility and presentation in shaping climate adaptation behaviors.
The third essay explores how a person’s income influences their decision to invest in risk prevention. Consider an individual who can spend money today to reduce the likelihood of a costly future loss. While it may seem intuitive that higher income would always lead to greater prevention, the relationship is more complex. An increase in first-period income provides more resources to invest in prevention. However, because prevention efforts targeting different risks often serve as substitutes, the additional income may be diverted to other areas, weakening the effect. Similarly, if second-period income increases, the potential loss may feel less burdensome, reducing the motivation to prevent it. Once again, the substitutability of prevention across risks complicates the decision. These competing forces are at play in both time periods. This essay identifies the necessary and sufficient conditions under which higher income clearly leads to more or less investment in prevention. In doing so, it sheds light on how financial capacity shapes risk-related decisions over time, offering new insights into how individuals manage future uncertainty.
Taken together, these essays reveal how individuals navigate risk under conditions of imperfect information and financial constraints. They underscore the importance of pricing design, effective risk communication, and behavioral responses in shaping the success of climate adaptation strategies. The findings suggest that even well-intentioned reforms or new risk disclosures may have limited impact if households lack the capacity or motivation to interpret them effectively. Understanding how people respond to costs, information, and future risks is thus critical not only for designing better insurance markets, but for supporting household resilience in the face of growing climate risk.
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