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(3)
(4)
Here L is the damage in the case of flood, IP is annual flood insurance premium, IC is
insurance coverage in the case of a disaster. It is assumed that housing search is cost-
ly, thus, households do not search for a global maximum but explore a subset of prop-
erties only, from which they select the one that delivers highest utility. Thus, buyers
do not operate within a framework perfect information.
Buyers have subjective perceptions of flooding probability, which may be biased
compared to the objective probability P. Risk perceptions could be dynamic over
time.
After a buyer has found the property that gives her maximum utility, she submits
her bid price to a seller. Buyers bid differently depending on how long a property is
on a market and on their relative market power (Eq. 5 or 6). Real estate guidelines
suggest that buyers bid between 3-5% below ask price, and up to 7-10% below ask
price if they want to be aggressive and if a property is long on market. Thus:
; (5)
where h is a random number between 0-10% of the ask price of a seller.
If it is a sellers' market meaning that there is excess demand for certain areas then
buyers need to be more strategic and bid high enough to assure they actually get the
property that maximizes their utility.
; (6)
However, in any case buyer's bid price should not exceed her reservation price,
which is when translated into annual payment should not exceed 30% of her annual
income.
2.4
Sellers' Behavior
At the model initialization stage some properties are for sale, i.e. each property has a
seller (Figure 2). As simulation goes on, settled households may decide to move as
their utility (Eq. 2) decreases compared to the original level.
At the beginning of a trading period active sellers announce their ask prices . They
do so by requesting regression coefficients from the hedonic analysis of the current
period and applying them on their property. At the initialization stage this hedonic
function and coefficients come from (Bin et al. 2008). As model runs and new trans-
actions occur real estate agents are rerunning the hedonic analysis. Regression coeffi-
cients may change as for example risk perceptions are evolving or new households
with different preferences for locations are arriving to the city.
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