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Consequences of Public Programs and Private Transfers on Household’s Investment in Storm Protection

Mahmud, Sakib and Hassan, Gazi (2014): Consequences of Public Programs and Private Transfers on Household’s Investment in Storm Protection.

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Abstract

Due to rising incidences of natural calamities, governments are lacking capacity to properly protect households living in areas which are prone to disasters like cyclones and associated storm surges. To protect the property damages of the disaster victims, private storm protection activities need to be better understood within a systematic framework. We develop a theory of household private investment in storm protection, where the storm surge risk is endogenous and analyse how the behavioural responses – ex-ante self-protection expenditures and ex-post self-insurance expenditures – of the households are affected by both government transfers and remittances. The interior solutions of the model show that for a risk-averse household, ex-ante government spending on public programs leads to crowding-in of self-protection, but crowding-out of self-insurance. Whereas, self-protection declines (i.e., becomes a substitute) but self-insurance increases (i.e., becomes a complement) if households have more access to ex-post public-assisted disaster relief and rehabilitation programs. For a risk-neutral household, self-protection declines (i.e., becomes a substitute) but self-insurance increases (i.e., becomes a complement) if households have more access to private inward remittances.

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