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Fig. 1.
UML class diagram of a coastal land market model
At the beginning of a trading period all active buyers start searching for a property
that maximizes their utility. Household's utility depends on a combination of compo-
site (
z
) and housing (
s
) goods which is affordable for her budget (
Y
) net of transport
costs (
T(D)
):
or
(1)
Here
kH
is a coefficient to translate the asking price of a seller (
H
ask
) into an annual
payment. Preferences for housing good (
and amenities
) as well as exogenous
incomes (
Y
) are heterogeneous across household agents.
When choosing a location in a costal town with designated flood zones, a house-
hold operates under the conditions of uncertainty. Thus, she in fact maximizes her
expected
utility
(
EU
):
1
(2)
where
UF
is households utility in case flood event occurs,
U
NF
is utility in the case of
no flood, and
P
i
is a subjective risk perception of a buyer. In economic literature indi-
vidual, possibly biased, risk perception is often formalized by means of altering ob-
jective probability of flooding (P)
1
. Thus,
∆
, where
∆
is an individual bias
that changes over time.
1
We acknowledge that several alternative interpretations regarding the formalization of subjec-
tive risk perception may exist (i.e. misinformation about potential losses, misinformation
about probabilities, level of risk or loss aversion, feeling of worry and dread, etc.). The impli-
cation of alternative formalizations of subjective risk perceptions is a subject for future work.
