Preferences for Earthquake Risk–Mitigation Mechanisms: Experimental Evidence

Abstract

This study investigates two risk-reduction mechanisms: self-insurance and market insurance. Specifically, it examines individuals’ preferences and valuations for these mechanisms to mitigate the earthquake risk in Turkey. An experiment designed to test the expected utility theory and previous theoretical frameworks was conducted with 78 subjects. The results indicate that self-insurance (retrofitting the house) and market insurance (earthquake insurance) are found to be substitutes. Furthermore, self-insurance and market insurance are found to differ significantly with respect to individuals’ valuations and buying decisions, and the subjects are found to prefer self-insurance to market insurance. This conclusion may provide some policy implications to assist the Turkish government in taking the necessary actions to mitigate disaster risk. The results suggest that the self-insurance mechanism, an urban renewal project, should be invested in more than the market insurance mechanism, the Turkish Compulsory Insurance Pool. Population characteristics are discussed according to their insurance preferences.