Should earthquake mitigation measures be voluntary or required?

Abstract

This paper examines whether or not one should require homeowners to adopt cost-effective loss reduction measures (LRMs) on residential structures in earthquake prone areas. Congress is considering requiring homeowners in earthquake-prone areas to purchase earthquake insurance as a condition for a federally insured mortgage but is still debating what action should be taken regarding mitigation. We show that the incentive to voluntarily adopt LRMs is reduced if homeowners are covered by full insurance rather than being uninsured. This result holds even if individuals have accurate information on the risk and maximize expected utility. The empirical evidence indicates that few homeowners adopt mitigation measures whether they are insured or uninsured. Most individuals do not behave as if they maximize expected utility and instead seem to employ simplified decision rules which suggest that mitigation measures are unnecessary or too costly in relation to the perceived benefits. These findings suggest that it may be necessary to strengthen building codes and/or require the adoption of mitigation measures on existing structures in return for reduced earthquake insurance premiums.