Highlights from Our May 2025 Hoover Institution Event on Adapting to Wildfire and Flood Risk

In early May 2025, I organized and moderated a great Hoover Panel focused on the microeconomics of adapting to wildfire and flood risk. Here is an overview of our conference on Markets versus Mandates.

In the aftermath of the January 2025 LA Fires, I have written extensively about how to configure private sector and public sector incentives to increase disaster risk resilience. Here is my City Journal piece with Joe Tracy and here is a free copy of my new e-book (An Introduction to Natural Disaster Economics).

During our panel, I invited Judd Boomhower to discuss wildfire risk and Margaret Walls to discuss flood risk. We had a great group discussion.

We were given a late afternoon time slot and the audience was sleepy. Below, I provide some of my quotes from the transcript.

Here is an action photo of myself from the event!

Here are some of my quotes from the transcript. PLEASE note that this was a group discussion and I’m only presenting my quotes. You can watch the whole video here!

I am sharing my quotes just to have some fun here and to convey some basic economics ideas.

Matthew Kahn: I sense a lot of energy in the room and I bring good news. This, this is going to be a great panel or your money back. Folks, I'm Matthew Kahn and on January, it was either January 7th or January 8th, I flew back from Hoover to Los Angeles and I flew over the fires and I made a video of it.

I've shown it to my mother in law. She's asked me to stop showing it to her. And just the horror that this was just the beginning of the challenge for the L A region was the nudge as I gently nudged Terry and Nick that we have a panel on rare disasters and are worried that these disasters could become less rare.

And how do we set up incentives, how do we use markets? Apparently incentives matter. Folks, a round of applause for incentives. How the critical role of markets in improving our quality of life and especially during times of extreme risk. I want to live in an economy where flood risk and wildfire risk are less common and a question of how we configure the rules of the game such to align incentives.

I'm very worried that much of the LA disaster was man made and an unintended consequence of many regulations with huge unintended consequences. So folks, if you google my name and you Google Khan and Kindle for an inferno, you can see some of my Hoover thinking. But with that I'm going to walk off the stage and bring in our great panelists.

We're very lucky to have Margaret Walls from Resources for the Future and Judge Judd Boonheimer from UC San Diego and the way we're going to set this up is Margaret's going to kick this off and she has great slides. I'm going to stay awake and then we're going to.

When we hit slide 5 roughly Judd is going to chime in and our discussion is going to begin. Margaret?

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>> Matthew Kahn: Margaret, thank you. That was fantastic. And it's gonna tee up Judd after I crack a joke. So folks, if I had a tattoo, it would be that equation.
>> Margaret Walls: God.
>> Matthew Kahn: Well, it would be that or what?

I won't say, folks, I'm fascinated by all three terms. Some of my work is about that exposure term. If we see people moving to one of these disaster areas, my teacher Gary Becker would say, why? Is it that they are unaware of the risk of those areas? Or is it that we have zoned for single family housing in safer areas, deflecting people into fire zones?

Or is it that insurance is subsidized by certain government entities encouraging people to move to those areas? And so I am fascinated by are we passive victims or are we. What are we aware of? And I'm going to set up Judd. Roger Pielke Jr. talks about the bullseye effect, that one of the reasons that damages from disasters are rising, is that more and more of us are located in Margaret's exposure box of why and under what different incentives.

How do we use markets to give people more freedom to live where they want to live? So, Judd, to tee this up for you. How in your exciting work on wildfire adaptation, can you walk us through how you're thinking about these three terms and how does your work link to those terms?

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>> Matthew Kahn: Judd. Thank you, so we need to inject some amphetamines into this room. And so let's do it like this. Judd, you have. You may not be aware of this.

You have a very exciting Oregon field experiment that you're writing. Can you tell this room about your work or do you want me to do it?
>> Judson Boomhower: Yeah, so what we're doing in Oregon is inspired by one way of thinking about what we're doing in Oregon is we want to understand what.

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>> Matthew Kahn: Margaret, thank you. And I highly recommend her paper. Margaret, a slight libertarian question. Is the NFIP crowding out private insurance that I keep writing on my substack that the insurance industry could be the adult in the room if state insurers didn't put price caps on insurance.

And so the question I want to ask is if as our budget deficit rise continues to rise at the federal level, will could a Trump administration phase out the NFIP or is that naive policy a little history? This, would this unleash the private sector?

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>> Matthew Kahn: so that actually Margaret, thank you. And so a question for both of you. With the rise of the information technology revolution. So Judd has done some terrific co authored work on that. Older vintages of housing face greater wildfire risk.

We have better and better big data allowing insurers to engage in something called price discrimination and that and it could raise their profitability relative to insurers in the 1920s. So Judd, with your work that older properties in California face more fire risk would should these grannies of these homes, can we price gouge them and charge them more for insurance but give them a discount if they, if they update their roof from Led Zeppelin's time in the 1970s.

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>> Matthew Kahn: I agree. And from a competitive point of view, if there's an insurer who is innovative here, we would hope that they would earn greater profits. And I. So Judd, in the case of California wildfires, maybe you're going to say State Farm, is there an insurer who is innovating here the most or does Ricardo Lara's price ceilings put represent an implicit tax on innovation here?

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> Matthew Kahn: So that's a fiscal externality. So I wish we lived in Milton Friedman's world where a quality service provider, that's common knowledge and he or she can charge a price premium for that because of excellent service.

So after a disaster that you get your check the next day, you're not asked to itemize all your jewelry and all your tattoos. Margaret, my final question before I open this up in Asheville, North Carolina, that recent disaster where it flooded in a place that had never flooded before.

I debate many young economists on themes from behavioral economics. I'm the last of the rational expectations economists in the case of flood risk. Is is it your belief as an economist that is a thinker, that people systematically underestimate these risks or I've been interested in how much do themes from behavioral economics slow down climate change adaptation.

So Richard Thaler won the Nobel Prize in Economics and sort of cliche is modeling people as Homer Simpson of blissfully unaware of risks that are emerging while I model people as Mr. Spock from Star Trek. So Margaret, if you think about flooding, a cliche of what percentage of home buyers these days are Homer versus Mr Spock?

And what can First Street foundation, other entities do to help people to update their beliefs so that we don't have buyer beware, buyer regret?

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> Matthew Kahn: And Judd, on this point, am I right that with wildfires we actually get negative correlation?

So if we burned out, if we burn down the trees, that wildfire is less likely going forward, do people understand this negative auto correlation? That was a joke.

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