Discussion Papers 2019

CIRJE-F-1130	"On the Stability of Preferences: Experimental Evidence from Two Disasters"
Author Name	Kuroishi, Yusuke and Yasuyuki Sawada
Date	November 2019
Full Paper	PDF File
Remarks

Abstract
The literature concerning how preferences are affected by extreme events is characterized by mixed findings. To bridge this gap, we investigate the impacts of two disasters triggered by different natural hazards on present bias, exponential time discounting, and curvature parameters of a utility function. These are elicited in an integrated manner by the convex time budget (CTB) experiments as well as the multiple price list (MPL) experiments. Based on these approaches, we employ sui generis experimental data and accurate disaster damage information from the official metrical surveys in Iwanuma city of Japan and from satellite images of the East Laguna Village of the Philippines, which were hit, respectively, by a strong earthquake and tsunami in 2011 and serious floods in 2012. First, we find that disaster exposure makes individuals more present-biased and less risk-averse regardless of distinctive differences in socio-economic conditions and disaster types. Second, the impact lasted for 6 years in both areas, suggesting persistency of the effect. Third, our results are consistent with emotional channels but not necessarily with a potential market friction in the form of binding liquidity constraints. Our findings suggest that the existing mixed empirical evidence can be attributed to the lack of an integrated and consistent framework as well as accurate data on disaster damages, rather than variations in literacy or education levels of experimental subjects.

Abstract

The literature concerning how preferences are affected by extreme events is characterized by mixed findings. To bridge this gap, we investigate the impacts of two disasters triggered by different natural hazards on present bias, exponential time discounting, and curvature parameters of a utility function. These are elicited in an integrated manner by the convex time budget (CTB) experiments as well as the multiple price list (MPL) experiments. Based on these approaches, we employ sui generis experimental data and accurate disaster damage information from the official metrical surveys in Iwanuma city of Japan and from satellite images of the East Laguna Village of the Philippines, which were hit, respectively, by a strong earthquake and tsunami in 2011 and serious floods in 2012. First, we find that disaster exposure makes individuals more present-biased and less risk-averse regardless of distinctive differences in socio-economic conditions and disaster types. Second, the impact lasted for 6 years in both areas, suggesting persistency of the effect. Third, our results are consistent with emotional channels but not necessarily with a potential market friction in the form of binding liquidity constraints. Our findings suggest that the existing mixed empirical evidence can be attributed to the lack of an integrated and consistent framework as well as accurate data on disaster damages, rather than variations in literacy or education levels of experimental subjects.