Working Paper No. 06-07

Risk Externalities and the Problem of Wildfire Risk
Aric Shafran
October, 2006

ABSTRACT

Homeowners living in the wildland-urban interface must decide whether or not to create a defensible space around their house in order to mitigate the risk of a wildfire destroying their home. Risk ex- ternalities complicate this decision; the risk that one homeowner faces depends on the risk mitigation decisions of neighboring homeowners. This paper models the problem as a game played between neighbors in a wildland-urban interface. The model predicts that one of two outcomes is likely: most or all homeowners have a defensible space or no homeowners have one. Data from Boulder County, Colorado confirm that a household's defensible space decision depends on the defensible space outcomes at neighboring sites. The model provides insights into the likely effectiveness of programs designed to encour- age households to create defensible space as well as the prospects for insurance to provide incentives for economically efficient mitigation

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