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Environmental and Resource Economics

, Volume 71, Issue 1, pp 301–318 | Cite as

Storm Damage and Risk Preferences: Panel Evidence from Germany

  • Goytom Abraha KahsayEmail author
  • Daniel Osberghaus
Article

Abstract

Individuals’ risk preferences may change after experiencing external socio-economic or natural shocks. Theoretical predictions and empirical studies suggest that risk taking may increase or decrease after experiencing shocks. So far the empirical evidence is sparse, especially when it comes to developed countries. We contribute to this literature by investigating whether experiencing financial and health-related damage caused by storms affects risk preferences of individuals in Germany. Using unique panel data, we find that household heads were more risk-seeking after they experienced storm damage. We do not find evidence of exposure to storm per se (regardless of damage experience), which suggests that household heads have to suffer damage for their risk preferences to be affected. These results are robust across a battery of alternative model specifications and alternative storm damage measures (magnitude of financial damage). We rule out other potential explanations such as health-related and economic shocks. The self-reported storm damage data is broadly confirmed by regional storm damage data provided by the insurance industry. While we cannot identify the channels through which experiencing storm damage affects risk preferences from our data, we suggest and discuss some potential channels. The results may have important policy implications as risk preferences affect, for instance, individuals’ savings and investment behaviour, adoption of self-protection and self-insurance strategies, and technology adoption.

Keywords

Extreme weather Risk preferences Risk seeking Storm damage Panel data 

JEL Classification

C23 D03 D81 Q54 

Notes

Acknowledgements

We thank Kibrom A. Abaya, Carlo Gallier, Francois Laisney, and the participants at the EAERE annual conference as well as the young researchers workshop “Environmental and Resource Economics” of the Verein für Socialpolitik for helpful comments and suggestions. Financial support of the German Ministry for Education and Research (BMBF), under grant 01LA1113C, is gratefully acknowledged. The funding source had no involvement in study design, collection, analysis and interpretation of the data, and writing of the article.

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Copyright information

© Springer Science+Business Media Dordrecht 2017

Authors and Affiliations

  1. 1.Department of Food and Resource EconomicsUniversity of CopenhagenFrederiksberg CDenmark
  2. 2.Centre for European Economic ResearchMannheimGermany

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