But beyond these well-identified biases in decision-making, taking risks is sometimes an unavoidable (or desirable) consequence of development and economic growth. Investing in risky areas can be a conscious and well-informed choice, justified by economic benefits. For instance, increase exposure to natural hazard can be an unavoidable side-effect from investments to create additional employment and growth from international trade in areas characterized by low transportation costs but exposed to flood risks (e.g., (Gallup et al., 1998)). In China, for instance, (Fleisher and Chen, 1997) find that Total Factor Productivity (TFP) is 85% higher in coastal regions than inland, and that TFP growth is not significantly different in spite of higher investment in inland regions, suggesting a permanent productivity advantage in coastal regions from lower transport costs. As an illustration, landlocked countries have higher transport costs (measured by the shipping costs), and had over the 1965-1990 period a growth rate on average 1 percent lower than coastal countries, which are at risk from coastal floods and storms (Gallup et al., 1998). Cheap waterway transport attracts industrial production close to floodplains, and partly explains why most large cities are located on rivers. In coastal areas, increased exposure to flood can therefore be a deliberate trade-off against higher productivity and economic growth.

The same thing may happen in cities. The drivers of economic growth are concentrated in cities, and productivity growth is larger in cities in part because of positive agglomeration and concentration externality. (Ciccone, 2002; Lall and Deichmann, 2012; World Bank, 2008) report urban-rural income ratios between 1.5 for developed countries and up to 3 for developing countries, suggesting higher productivity in cities at all stages of development. And not only are productivity and consumption higher in urban areas, but amenities and infrastructure services are often superior: among low-income countries with urban population shares of less than 25 percent, access to water and sanitation in towns and cities is around 25 percentage points higher than in rural areas (World Bank, 2008). These differences create strong incentives for rapid rural-urban migration. Confronted with land scarcity and high land costs in large cities, this migration has led to construction in at-risk areas (Burby et al., 2006, 2001; Lall and Deichmann, 2012). In the most marginal and risky locations, informal settlements and slums are often present, putting poor and vulnerable populations in a situation of extreme risk (Ranger et al., 2011).

An illustrative example of poor people settling in risky areas is Mumbai, prone to high flood risk from the Mithi River. Within the Mithi River basin lie a dense population estimated at 1.5 million and a high concentration of assets. Flood hazard, combined with high socio-economic exposure pose a major risk, evidenced by unprecedented floods in July 2005, which resulted in more than 500 fatalities and $2bn in asset losses (Ranger et al., 2011). Patankar (2015) reports on a surveys of poor households living in Mumbai’s flood areas, and shows that poor people are well aware of this risk, and are making a deliberate decision to live there to benefit from higher-wage jobs, better schools and medical care, and existing social networks.

Risk-taking can also increase welfare through environmental amenities (e.g., from sea views) and generate revenues from tourism. One measure of the importance of tourism to an economy is the percentage of international tourism expenditures as a percentage of total imports. As of 2012, in eleven countries (Bahamas, Cabo Verde, Dominica, Grenada, Macao, Maldives, Montenegro, Samoa, Sao Tome & Principle, St. Lucia, St. Vincent and the Grenadines, and Vanuatu) tourism accounted for more than half of total exports (World Bank, 2015b). Most of these countries are island nations exposed to natural risk (mostly 17