As long as only a small percentage of people in flood-prone areas receive payments (and which villages receive them isn’t too predictable), I wouldn’t expect any meaningful moral-hazard effect. I don’t expect people would move into such an area for a tiny chance at receiving a payment of this size at some point in the future. And the people who were already there before GiveDirectly started the program weren’t motivated by the pilot program.
I agree with Jason that the specific moral hazard of “people might move to flood-prone areas in order to get cash” seems unlikely to be a concern.
The moral hazard that I was thinking of when I read Robi Rahman’s comment was “people who already live in flood-prone areas might be less prone to invest in flood defences/move away/do other things in light of the information that floods may be coming”
I think that’s contingent on the percentage of people who receive payments, and the ability to predict one’s likelihood of receipt. If GD gives money to the same people every flood season, then I would be much more concerned about this than if everyone in the flood zone knows they have a 5% chance of receiving money in any year their area was flooded.
If the question is whether the beneficiaries may be more likely to stay / underinvest / not take action once identified as conditional beneficiaries shortly before the flood—it didn’t sound like getting the payment was conditional on being in the flood zone when the flood actually hit. If you were pre-registered to location X earlier in the season, and location X was selected as a beneficiary site, it sounds like you got paid. If that’s true, one could argue for the opposite effect—evacuation can be pricey, last-minute flood defenses require resources, etc. So getting them money a few days ahead of the storm might enable better risk-mitigation measures. I’m thinking of the people in the US who didn’t leave before Hurricane Katrina due to lack of funds.
I don’t expect people would move into such an area for a tiny chance at receiving a payment of this size
This isn’t something I expect either, and I think you may be slightly misunderstanding the mechanism by which moral hazard leads to bad outcomes.
When moral hazard hurts regular people who have their money in the banking system, it’s not because a bank executive specifically tried to bankrupt their corporation to collect bailout funds from the government. Rather, it is the toxic incentive structure caused by privatized payoffs and socialized losses. These executives can gamble money on risky business practices knowing that they’ll keep the profits and be rewarded if they succeed, but the government will pick up the mess if they backfire.
Right now the state flood insurance systems of California and Florida are insolvent, because these states have been paying out claims at an increasing rate while the homeowners’ lobbies have blocked a corresponding increase in insurance prices. Private insurers are losing money and considering ending their business in these states altogether, and then the state insurance funds will be unable to pay out all its obligations in the next inevitable (and entirely foreseen) 100-year flood. The federal government has been exacerbating this problem by 30 years by subsidizing flood insurance costs, which encourages people to keep living in flood-prone areas they otherwise would rightly avoid.
But, payments from GiveDirectly are on a far smaller scale, and may not have an analogous effect.
I don’t think we disagree much if any—my next point was that the people in these areas had decided to live there prior to and independently of GiveDirectly’s action. To the extent they were engaging in a cost-benefit analysis, the current residents had already decided it was worth the flooding risk.
At least in Florida, my understanding is that many of the more at-risk properties would not have been built at all (or at least re-built) but for the government subsidized insurance covering the bulk of losses with very high probability. Between the size of the GD payments, and the small fraction of flooded people who receive them, an analogous effect here seems unlikely to me.
If the flooding is predictable, are we causing moral hazard by subsidizing farming in flood-prone areas?
As long as only a small percentage of people in flood-prone areas receive payments (and which villages receive them isn’t too predictable), I wouldn’t expect any meaningful moral-hazard effect. I don’t expect people would move into such an area for a tiny chance at receiving a payment of this size at some point in the future. And the people who were already there before GiveDirectly started the program weren’t motivated by the pilot program.
I agree with Jason that the specific moral hazard of “people might move to flood-prone areas in order to get cash” seems unlikely to be a concern.
The moral hazard that I was thinking of when I read Robi Rahman’s comment was “people who already live in flood-prone areas might be less prone to invest in flood defences/move away/do other things in light of the information that floods may be coming”
I think that’s contingent on the percentage of people who receive payments, and the ability to predict one’s likelihood of receipt. If GD gives money to the same people every flood season, then I would be much more concerned about this than if everyone in the flood zone knows they have a 5% chance of receiving money in any year their area was flooded.
If the question is whether the beneficiaries may be more likely to stay / underinvest / not take action once identified as conditional beneficiaries shortly before the flood—it didn’t sound like getting the payment was conditional on being in the flood zone when the flood actually hit. If you were pre-registered to location X earlier in the season, and location X was selected as a beneficiary site, it sounds like you got paid. If that’s true, one could argue for the opposite effect—evacuation can be pricey, last-minute flood defenses require resources, etc. So getting them money a few days ahead of the storm might enable better risk-mitigation measures. I’m thinking of the people in the US who didn’t leave before Hurricane Katrina due to lack of funds.
This isn’t something I expect either, and I think you may be slightly misunderstanding the mechanism by which moral hazard leads to bad outcomes.
When moral hazard hurts regular people who have their money in the banking system, it’s not because a bank executive specifically tried to bankrupt their corporation to collect bailout funds from the government. Rather, it is the toxic incentive structure caused by privatized payoffs and socialized losses. These executives can gamble money on risky business practices knowing that they’ll keep the profits and be rewarded if they succeed, but the government will pick up the mess if they backfire.
Right now the state flood insurance systems of California and Florida are insolvent, because these states have been paying out claims at an increasing rate while the homeowners’ lobbies have blocked a corresponding increase in insurance prices. Private insurers are losing money and considering ending their business in these states altogether, and then the state insurance funds will be unable to pay out all its obligations in the next inevitable (and entirely foreseen) 100-year flood. The federal government has been exacerbating this problem by 30 years by subsidizing flood insurance costs, which encourages people to keep living in flood-prone areas they otherwise would rightly avoid.
But, payments from GiveDirectly are on a far smaller scale, and may not have an analogous effect.
I don’t think we disagree much if any—my next point was that the people in these areas had decided to live there prior to and independently of GiveDirectly’s action. To the extent they were engaging in a cost-benefit analysis, the current residents had already decided it was worth the flooding risk.
At least in Florida, my understanding is that many of the more at-risk properties would not have been built at all (or at least re-built) but for the government subsidized insurance covering the bulk of losses with very high probability. Between the size of the GD payments, and the small fraction of flooded people who receive them, an analogous effect here seems unlikely to me.