Participation in Young Scientist Summer Programme(YSSP), International Institute for Systems Analysis (IIASA)

Climate change is expected to result in an increased frequency of floods. Besides the damage caused by the direct impact from floods, there are substantial indirect effects often labelled as business interruptions. Little is in fact known about these indi rect effects, both in terms of mechanisms and in terms of size. It is however widely recognised that they can be large. One reason is that indirect effects tend to persist through time, slowing down the recovery process. I focus on the interaction betwe en housing- and labour-markets and household location decisions, while incorporating the necessary level of detail to allow for heterogeneity. Studies have found a negative impact on house-prices from floods, one candidate explanation being that the flood leads to an increase in risk awareness. The extent to which such risk perceptions affect households' location decision differs between household groups. One possibility is that a flood leads to an increased concentration of certain household types in flo oded areas, for example low income types. On the supply side, firms wish to locate in areas close to qualified labour and consumers. The exodus of firms from flooded areas can further strengthen the concentration of low income households. Current econo mic models employed to assess the long term and indirect effects of floods are ill suited for analyses of such nonlinear phenomena as natural disasters. The existing literature of recognises the need for a modelling framework which takes heterogeneity and non-rationality into account. The main added value of this project will be the formulation of a model which includes such elements.