Information Shock of Disaster and Hazard : Impact of Kaohsiung Gas Explosions and Risk Disclosure on the Equalizing Difference in the Housing Market

Disasters could damage the economy and market. Many studies inquire how a calamitous event changes household risk perception and home value to understand the hazard’s influence on expected utility. A remaining challenge is identifying equalizing difference, a necessary spatial equilibrium condition, keeping households indifferent among properties with different disaster risks. We fill this gap, analyzing a quasi-natural experiment with two events: the 2014 Gas Explosions in Kaohsiung city and subsequent disclosure of all underground petrochemical pipelines. A spatial model with prospective reference theory predicts home value changes after each event for areas with different risks. It distinguishes the equalizing difference from the price changes induced by risk perception adjustments. The Empirical analysis applies 2013-2016 housing transaction data to difference-in-differences (DD) of two events. Existing DD studies only assess the price change of a disaster-risk perception adjustment. Our analysis not only obtains estimates of that kind. Importantly, we uncover an equalizing difference worth 2.6% home value compensating for households’ risk exposure. All estimates agree with theoretical predictions, and a common trend exists. The equalizing difference shrinks with distance to hazard and time. Market evidence shows the neighborhood struck by the disaster has regained energy, a finding with implications for urban resilience