October 25, 2019
Causing numerous deaths and billions of dollars in damages, recent wildfires in California have raised concerns about growing wildfire risk. As people become more vulnerable to wildfire risk, it is imperative that information regarding such risk is effectively communicated.
Currently, the California Department of Forestry and Fire Protection (CAL FIRE) generates and publicizes ‘Fire Hazard Severity Zone’ maps. To ensure this information is provided to perspective buyers, California enacted a law in 1998 requiring sellers to inform buyers of their home’s location within fire hazard zones. If the mandated disclosures by this law effectively communicate risk information at the time of home sale, wildfire risk should be reflected in sale prices. We examine whether this law results in the capitalization of wildfire risk into residential property sale prices to gain a better understanding of responses to risk information.
Using California property sales data from Zillow beginning in 1993 through 2017, we leverage a natural experiment that exists due differences in disclosure mandates at the local level. As the disclosure law is written, local governments have the ability to reject the state’s recommendation of fire hazard zones. Since the local do not uniformly adopt the state recommended hazard zones, bypassing the legal disclosure requirement, this presents a unique opportunity to observe areas with similar risk levels but different disclosure mandates.
We estimate a differences-in-differences model using home sales located in areas that have adopted the CAL FIRE maps as the control group and home sales located in areas that have not adopted the CAL FIRE maps, and have no legal responsibility to disclose, as the treatment group. Any differences in price are suggestive of the effect of disclosure rather than underlying objective risk or experience with wildfires. To our knowledge, our study is the first to complete a causal analysis on the effect fire risk information disclosed and presented to California residents. As wildfires become more costly and devastating, understanding responses to risk communication is crucial to incentivize risk-mitigating actions.
Kelly Hellman, UMass Lowell, Department of Economics
Carolyn Kousky, University of Pennsylvania, Wharton Risk Center
Karl Korfmacher, Rochester Institute of Technology