Working Paper No. 06-07
Risk Externalities and the Problem of Wildfire Risk
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 externalities 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 encourage households to create defensible space as well as the prospects for insurance to provide incentives for economically efficient mitigation.
JEL classification: Q23, Q54, C72, D81, C21
Keywords: wildfire, risk, externalities, coordination games, spatial interactions