The Political Economy of Natural Disaster Damage

in the Insurance Sector " at LSE. All views expressed are our own and do not represent the views of Munich Re. We thank Eberhard Faust and Peter Höppe as well as participants of the 2011 Essex Summer School for many helpful comments. All errors are ours. The replication data and do-file will be made available upon publication at Abstract Economic damage from natural hazards can sometimes be prevented and always mitigated. However, private individuals tend to under-invest in disaster preparedness and mitigation measures due to collective action, information asymmetry and myopic behavior problems. Governments, which can in principle correct these market failures, also face incentives to under-invest in costly disaster preparedness policies and damage mitigation regulations. Yet, disaster damage varies greatly across countries. We argue that the larger a country's propensity to experience frequent and strong natural hazards, the more rational actors will invest in preparing for disasters and mitigating damage. Accordingly, economic loss from an actually occurring disaster will be smaller the larger a country's disaster propensity – holding everything else equal, such as hazard magnitude, the country's total wealth and per capita income. Even if governments implement effective mitigation measures, damage is not entirely preventable and smaller losses tend to be random. A higher disaster propensity will therefore have a more pronounced negative effect on predicted damage at the top end of the disaster damage distribution than at the bottom end. We find empirical support for our theory in a quantile regression analysis of economic loss from the three disaster types causing the vast majority of damage worldwide: earthquakes, floods and tropical cyclones.