Flood Risk as a Market Signal

Abstract

Adaptation to climate change has never been more urgent. The literature is full of examples when public (adaptation) action might create unintended consequences, for example, for individual risk perception and private actions. It is also well-known that people rarely understand risks objectively, implying that their choices are guided by biased risk perceptions. However, it remains unclear how these different effects interact and whether overall cumulative risks are reduced. This paper presents an agent-based model of a housing market to examine how alternative climate adaptation policies—traditional defenses and Nature-based Solutions (NbS)—interact with households’ biased risk perceptions, behavior, and affordability. We extend our existing housing market agent-based model (Filatova, 2015) to fit the Dutch context, enhancing it with a new negotiation algorithm, updated decision-under-risk behavioral model, and new empirical data on both housing prices and individual risk perceptions. Our simulations reveal that while NbS enhance resilience and environmental quality, they may also drive socioeconomic exclusion if access is not regulated. Traditional defenses reduce exposure but have a limited effect on spatial inequality. Our results unveil complex interactions between behavior and markets, highlighting that flood risk acts not only as a hazard but as a market signal shaped by individual perceptions and existing institutions. Equitable adaptation requires integrating physical protection with policies addressing affordability and behavioral dynamics.