David Wilson | Environmental Economics

Housing markets are spatially segmented, yet the empirical literature on climate risk capitalization typically treats flood risk as a uniform attribute valued consistently across geography. I argue that because homebuyers search within local markets, identification at wider spatial scales conflates within-neighborhood risk pricing with sorting across neighborhoods. The estimated discount therefore depends critically on how flood risk is relatively compared. Using a hedonic model applied to 41.4 million residential transactions, I compare estimates based on a one standard deviation increase in flood risk measured relative to the national, county, and ZIP code distributions. The implied discount declines from 4.9% when risk is indexed to national variation to 1.7% within counties and 0.9% within ZIP codes. This pattern suggests that much of the observed capitalization reflects cross-neighborhood differences rather than within-neighborhood pricing of marginal risk. I then examine whether information asymmetries lead buyers to underweight parcel-level flood risk prior to mandatory disclosure, exploiting South Carolina’s 2013 statewide flood disclosure mandate as a natural experiment. In a difference-in-differences framework, I find that the policy reform reduced prices for properties in Special Flood Hazard Areas by 5.4% relative to non-SFHA properties in the same county and month. A triple-difference specification further shows that disclosure steepened the price–risk gradient within the floodplain, with the capitalization of a one standard deviation increase in flood risk increasing by an additional 4.1% after the mandate. These findings are consistent with increased salience or improved information about flood hazards and suggest that targeted disclosure policies can meaningfully enhance the pricing of climate risk in residential
markets.