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transportation. Further developments are attracted to historic centers by agglomera-
tion forces (Fujita and Thisse 2002) as well as by rich environmental amenities. As a
result exposure and vulnerability in coastal areas rapidly increase due to the clustering
of population and growth of property values in flood-prone areas (IPCC 2012). Land
markets driven by individual preferences for locations play a crucial role in the forma-
tion of spatial patterns of activities and the economic value they receive (Randall and
Castle 1985; Parker and Filatova 2008). Currently properties in coastal areas are ex-
pensive driven by coastal amenities and low subjective risk perceptions of traders in a
housing market. As a matter of fact, many inhabitants of flood-prone areas worldwide
have very low risk perceptions (Terpstra and Gutteling 2008; Ludy and Kondolf
2012). This is likely to reverse as climate change propagates causing potentially non-
marginal changes in coastal land markets.
Modeling abrupt non-marginal changes in economic systems is challenging. Spa-
tial econometrics and analytical spatial economic modeling advanced significantly in
the recent years. Yet, methodologically they are designed to tackle marginal changes
in the underlying dynamics of spatial urban systems (Varian 1992; Fujita and Thisse
2002; Hackett 2011). For example the result of spatial econometrics analysis is a he-
donic function, which relates housing prices to a marginal change in the spatial and
structural attributes of a property. For properties in hazard zone it also provides a
marginal willingness to pay of a representative households for safety (i.e. or to avoid
flood/erosion risk). Since a hedonic function is a snapshot of a market at a certain
moment (Bockstael 1996), this willingness to pay for safety is not only constant
across households but also over time despite the growth of climate-induced probabili-
ties. Models tracing marginal changes are quite advanced and successful in projecting
land-use trajectories and price dynamics along the existing trend when no abrupt
irreversible changes in spatial environment or individual location preferences occur.
However, in the world with climate change, abrupt sudden non-marginal changes in
economic system are expected (Stern 2008). Personal experience of a disaster (Bin
and Polasky 2004; Kousky 2010) as well as information about such shocking events
elsewhere (Hallstrom and Smith 2005) affect individual expectations about future
safety and their decisions where to locate. Hedonic price studies reveal that flood risk
price discounts in hazard-prone areas are most evident immediately after a major
hurricane and flood event due to updated risks perception. However, the information
provided by the hazard event vanishes in 3-6 years, leading to changes in subjective
risk perceptions and disappearing price differentials in risk zones (Lamond and Prov-
erbs 2006; Bin and Landry Forthcoming). Thus, evolution of risk perception, which is
triggered by hazard events (and possibly exacerbated through social interactions, i.e.
opinion dynamics about flood risks in the area) plays a major role when buyers define
their bid price on a property and when an eventual transaction takes place. As hazard
probabilities grow with climate change we are to expect more frequent and more se-
vere hurricane and flood events, leaving less chance of diminishing risks perceptions.
As information about hazard event propagates and risk perception is updated, demand
for properties which are at the greatest risk will fall leading to possible outmigration,
price decrease and local housing bubbles in coastal cities.
