Effects of Risk Attitudes and Information Friction on Willingness to Pay for Precautionary Building Standards
Take-up rates for windstorm-resistant buildings remain relatively low even in areas with high exposure to hurricanes and tropical storms. To further investigate this issue, we extend the theory on WTP for prevention to include risk attitudes up to the fourth order, deriving total effects and testable predictions for mixed risk averters and mixed risk lovers’ WTP relative to higher order risk-neutral benchmarks. We then employ field experiments to elicit and test the effects of higher order risk attitudes (HORAs) and information friction on coastal homeowners’ WTP for precautionary building standards with insurance discounts. To elicit risk attitudes and WTP, we employ 50-50 model-free risk apportionment lotteries and payment card WTP experiments. Empirical analyses reveal insightful heterogeneity in the correlation between homeowners’ HORA subgroups and WTP for precautions that is partially consistent with theory. We demonstrate strong causal effects of information friction on WTP for precaution in the absence of a truncated WTP range; however, the effects appear to be positive among risk lovers.