Capitalization of Bundled Amenities and Hazards in Home Prices: The Case of Wildfire Exposure

Abstract

Wildfires represent a growing threat to property and human life due to climate change and development into higher exposure areas. These risks are particularly salient in the Arctic and subarctic where changes are occurring quickly. This paper uses a hedonic model of home sale prices in Alaska to estimate individuals’ willingness to pay to avoid wildfire exposure. A hedonic housing price analysis shows that the homes most exposed to wildfire actually sell at a premium compared to those homes that are least exposed. However, this premium disappears once proximity to public firefighting infrastructure is accounted for, suggesting that the premium reflects public mitigation and moral hazard. These findings highlight the influence of mitigation efforts and moral hazard in buyers' willingness to pay. Homeowners currently have an economic incentive to locate in high risk areas; more sophisticated insurance risk models and better aligning local taxes with risk may be potential policy interventions.