Discussion Paper 2000-04 

 Relationship between Risk Perception and Willingness-to-Pay for Low Probability, High Consequence Risk: A Survey

Ozlem Ozdemir and Jamie Brown Kruse *

Abstract

This paper explores the relationship between individuals’ risk perceptions and their willingness-to-pay (WTP) for increased safety in a low-probability, high-consequence event. Three conceptual models are developed to investigate the effect of perceived risk  and socioeconomic variables on willingness-to-pay for an in-residence storm shelter to protect against tornado risk. Three WTP measures: willingness to purchase (for an undisclosed price), willingness-to-pay a specific amount, and maximum willingness-to-pay are used in the models. Analysis of the data gathered from a contingent valuation and risk perception mail survey conclude:  (1) “risk ladder” measurement may not be adequate to explain risk perception;  (2) people make decisions on whether to purchase the shelter or not by looking at the perceived exposure to the hazard; however, the perceived severity of tornado risk has the largest effect on willingness-to-pay; and (3) presence of children in the house significantly increases the WTP.  (JEL: C42 Survey Methods)

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*Ozlem Ozdemir, Department of Economics, Texas Tech University, Lubbock, TX 79409-1014, USA.
Jamie Brown Kruse, Associate Professor of Economics, Texas Tech University, Lubbock, TX, USA. VGJLK@ttacs.ttu.edu ; Corresponding author.
This work was performed under the Department of Commerce NIST/TTU Cooperative Agreement Award 70NANB8H0059.  The authors thank Howard Kunreuther in particular for his help and advice with the survey design. In addition, we thank Kishor Mehta, Thomas Steinmeier, Eduardo Segarra, John Crooker, and Cengiz Yilmaz for their helpful comments and guidance.