# 4 DISCUSSION

This paper builds on Avner and Hallegatte (2019) in the analysis of the costs and benefits of three exante flood management policies in an urban setting using a simple urban economics framework: riskbased insurance, subsidized insurance and land use zoning. It adds several important features to the previous paper: i) income heterogeneity, with both low- and high-income groups; ii) various locational configurations, where the high-income group resides in the city center or the periphery, depending on the presence and value of amenities; and iii) three locations for flood-prone areas: uniformly distributed (as in Avner and Hallegatte (2019)), centrally located, or peripheral. These additions allow for a richer set of analyses and the study of whether the choice of flood management policy leads to: i) political economy issues, with antagonistic preferences between high- and low-income households; and ii) efficiency-equity trade-offs.

As in Avner and Hallegatte (2019), risk-based insurance maximizes total social welfare. If implementing risk-based insurance is not feasible for technical, social, or political reasons, subsidized insurance for widespread and rare floods, or zoning in the case of frequent and localized flood events, are close to optimal. This result confirms that more feasible, second-best options need not come at large expense in terms of efficiency in aggregate. Zoning avoids structural damage but creates land scarcity for building purposes and drives housing rents up. Subsidized insurance—in the form of a flood compensation fund that every household contributes to—only conveys risk information indirectly and to a small extent and does not drastically reduce construction. And while it maintains a large building stock and consequently low housing rents, it also increases damage to structures in flood-prone areas.

The good news is that, with only a few exceptions for specific types of flood events, the hierarchy of flood management options coincides between high- and low-income groups, irrespective of urban configuration (high-income households living in the city center or the periphery) and flood location. This somewhat surprising result is important because it indicates that the choice of flood management type should not theoretically lead to political economy problems, where antagonistic preferences between household groups lead to a suboptimal solution being retained. However, the absence of political economy issues hinges on households of both income groups being able to recognize not only the direct effect of policies on flood damage, but also the indirect effects that take place through land and housing market adjustments.<sup>7</sup> We also document that, compared to the myopic scenario—where landowners and households do not anticipate floods when making construction or locational decisions—flood management policies introduce flood risk information to a certain extent and therefore trigger land and housing market adjustments in the general equilibrium setting of classic urban economics that we employ here. Compared to the myopic scenario, these market adjustments redistribute costs between income classes, irrespective of who is directly affected by floods. As such, flood management policies can be progressive if the low-income group is hardest hit, or regressive if the high-income group is hardest hit. In most (but not all) cases, flood management policies would dominate the myopic scenario in terms of welfare outcomes for each income group and in aggregate.

We show that, although the hierarchy of flood management policies overwhelmingly coincides between income groups (and with aggregate social welfare by construction), it can nevertheless come at the expense of increased inequalities, compared to a no-flood scenario. Although both income groups prefer risk-based insurance, for central floods in the low income-high income configuration where low-

> 7 This result holds if we assume that households succeed in properly assessing the full benefits of the policies. In practice, it is realistic to assume that households properly assess the benefits of the policies that are related to flood losses, but may be blind to the benefits of the policies that are related to housing costs.

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