What if Dutch investors started worrying about flood risk? Implications for disaster risk reduction

Increasingly, roles and responsibilities of the public sector in flood risk management are receiving attention in research and policy. Part of the debate suggests that allocating risk to the private sector increases efficiency as it promotes individual adaptation, thereby reducing the impact if a disaster occurs. In this paper, we analyse the macroeconomic effects as risk-averse investors take flood risk into account in their investment decisions. Our case study is the large Rotterdam area in the Netherlands. Using a spatial computable general equilibrium model, we find that the decrease in investments in risky areas leads to a reduction in capital and production in the large Rotterdam area, leading to a reduction in potential monetary disaster losses, but not to a reduction in population. The reallocation of risk reduces the long-term impacts from a flood on government tax revenues, but it also leads to welfare losses among households residing in risky regions.