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The Economic Effects of Floods: Investigations of a Stochastic Model of Rational Investment Behavior in the Face of Floods
There is by now a large literature on the economic aspects of flood control and flood relief policies. The contribution of this paper lies in its careful scrutiny of one single critical aspect of the economics of floods, the choice of land use by a single land­ owner. We analyze that choice using the methods of dynamic programming, and in particular, we show how that choice is dependent on the probability of floods for his piece of land. The theory we have developed here has been developed in the context of floods. In fact, this work grew out of an empirical study of flood plain damages, when we found that the underlying theory was not yet developed.! In fact, we feel that the theory is of much more general interest. It is a theory of optimal investment choice under uncertainty when that uncertainty is a result of destruction or failure of the investment at a random date. This is the case in flood plains, but it is also the appropriate basic theory for understanding investment decisions in the face of earthquakes, fires, war damage, avalanches, and other kinds of disasters. These are only the more dramatic examples of situations where replacement is required at an uncertain date.
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The Economic Effects of Floods: Investigations of a Stochastic Model of Rational Investment Behavior in the Face of Floods
There is by now a large literature on the economic aspects of flood control and flood relief policies. The contribution of this paper lies in its careful scrutiny of one single critical aspect of the economics of floods, the choice of land use by a single land­ owner. We analyze that choice using the methods of dynamic programming, and in particular, we show how that choice is dependent on the probability of floods for his piece of land. The theory we have developed here has been developed in the context of floods. In fact, this work grew out of an empirical study of flood plain damages, when we found that the underlying theory was not yet developed.! In fact, we feel that the theory is of much more general interest. It is a theory of optimal investment choice under uncertainty when that uncertainty is a result of destruction or failure of the investment at a random date. This is the case in flood plains, but it is also the appropriate basic theory for understanding investment decisions in the face of earthquakes, fires, war damage, avalanches, and other kinds of disasters. These are only the more dramatic examples of situations where replacement is required at an uncertain date.
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The Economic Effects of Floods: Investigations of a Stochastic Model of Rational Investment Behavior in the Face of Floods

The Economic Effects of Floods: Investigations of a Stochastic Model of Rational Investment Behavior in the Face of Floods

by J. P. Brown
The Economic Effects of Floods: Investigations of a Stochastic Model of Rational Investment Behavior in the Face of Floods

The Economic Effects of Floods: Investigations of a Stochastic Model of Rational Investment Behavior in the Face of Floods

by J. P. Brown

Overview

There is by now a large literature on the economic aspects of flood control and flood relief policies. The contribution of this paper lies in its careful scrutiny of one single critical aspect of the economics of floods, the choice of land use by a single land­ owner. We analyze that choice using the methods of dynamic programming, and in particular, we show how that choice is dependent on the probability of floods for his piece of land. The theory we have developed here has been developed in the context of floods. In fact, this work grew out of an empirical study of flood plain damages, when we found that the underlying theory was not yet developed.! In fact, we feel that the theory is of much more general interest. It is a theory of optimal investment choice under uncertainty when that uncertainty is a result of destruction or failure of the investment at a random date. This is the case in flood plains, but it is also the appropriate basic theory for understanding investment decisions in the face of earthquakes, fires, war damage, avalanches, and other kinds of disasters. These are only the more dramatic examples of situations where replacement is required at an uncertain date.

Product Details

ISBN-13: 9783540059257
Publisher: Springer Berlin Heidelberg
Publication date: 08/24/1972
Series: Lecture Notes in Economics and Mathematical Systems , #70
Edition description: Softcover reprint of the original 1st ed. 1972
Pages: 90
Product dimensions: 7.01(w) x 10.00(h) x 0.01(d)

Table of Contents

1. Introduction.- Outline of the Study.- 2. Background and Assumptions.- The Landowner or Investor.- The Description of Available Activities.- The Choice of Replacement Date.- The Effect of Floods.- The Probability of Floods.- 3. The Choice of the Optimal Activity.- 4. The Optimal Replacement Policy.- 5. When Flood Probabilities are Unknown: The Bayesian Approach.- Incomplete Information about µ.- The Description of Beliefs and of Learning.- The Simple Case: Investment Contracts can only be Made After Floods.- An Intermediate Case.- The Case where Replacement is Possible at any Time.- 6. Flood Control and Relief Measures: An Elementary View.- The Definition of Flood Damage.- Dams, Levees, and Other Flood Protection Works.- Flood Insurance.- Flood Relief.- Flood Plain Zoning.- 7. Computer Simulation of Investment Behavior in a Flood Plain.- Appendix FORTRAN Computer Program.
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