Insure or Adapt? Household Balance Sheets and the Flood Risk Tradeoff, April 2026
This paper studies how household balance sheets shape two key margins of flood-risk mitigation by homeowners: insuring and investing in adaptation. Using FEMA survey and NFIP administrative data, I show that floodproofing reduces realized damages and premiums, but insurance and adaptation respond to different financial margins. To interpret these patterns, I develop a dynamic heterogeneous-agent model featuring tenure choice, mortgage debt, public flood insurance, and lumpy adaptation investment. The model shows that insurance primarily protects liquidity-constrained households against short-run flood-state cash-flow risk, while adaptation is a wealth-protection investment chosen by households with sufficient equity and internal resources. This distinction implies that insurance and adaptation are not simple substitutes: raising premiums under risk-based pricing may reduce insurance coverage without inducing financially constrained households to adapt. The results highlight a central policy tradeoff for the NFIP: pricing flood risk accurately improves fiscal discipline, but without complementary support for adaptation finance, it may weaken household resilience precisely among those most exposed to balance-sheet constraints.
What Happens When We Run Out? Growth, Circularity and the Global Sand Shortage with Derek Thiele, March 2026