Risk Externalities and the Problem of Wildfire Risk

Homeowners living in the wildland urban interface face a decision of whether or not to create a defensible space around their house in order to reduce the risk of a wildfire destroying their home. Risk externalities complicate this decision; the risk that one homeowner faces depends on the mitigation decisions of neighboring homeowners. This paper models the problem as a game played between neighbors in a wildland urban interface. Multiple Nash equilibria may exist, some of which are sub-optimal. The model predicts outcomes that are consistent with mitigation outcomes in many communities: in some communities just about everyone mitigates while in other communities almost no one mitigates. The model provides insights into the likely effectiveness of current programs designed to encourage households to mitigate as well as the prospects for insurance to provide incentives for economically efficient mitigation.