Policy for promoting seismic retrofitting based on Libertarian Paternalism

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This study proposes a new type of warranty policy that appliesthe “nudge” concept developed by Thaler and Sunstein (2008) to encourage homeownersin Japan to implement seismic retrofitting. Homeowner adaptation to natural disastersthrough loss reduction measures is known to be inadequate. To encourage proactive riskmanagement, the “nudge” approach capitalizes on how choice architecture can influencehuman decision-making tendencies. For example, people tend to place more value on warrantyfor consumer goods than on actuarial value. This study proposes a “warranty for seismicretrofitting” as a “nudge” policy that gives homeowners the incentive to adopt lossreduction measures. Under such a contract, the government guarantees all repair costsin case the house gets damaged by an earthquake if the homeowner implements seismicretrofitting. To estimate the degree to which a warranty will increase the perceived valueof seismic retrofitting, we use field survey data from 1,200 homeowners. Our results showthat a warranty increases the perceived value of seismic retrofitting by an average of33%, and an approximate cost benefit analysis indicates that such a warranty can be moreeconomically efficient than an ex-ante subsidy. Furthermore, we address the failure ofthe standard expected utility model to explain homeowners’ decisions based on warrantyevaluation, and explore the significant influence of ambiguity aversion on the efficacyof seismic retrofitting and non-analytical factors such as feelings or trust