Are Private Defensive Expenditures against Storm Damages Affected by Public Programs and Natural Barriers? Evidence from the Coastal Areas of Bangladesh

This paper introduces a theoretical model combining household production with an endogenous risk framework in order to understand how ex-ante private spending by coastal households would evolve against ex-post cyclone induced storm surge damage risk given the level of government protective spending and the presence of a mangrove forest. The theoretical model confirms the influence of public protection programs and the mangrove forest on private defensive expenditures depending on whether the public programs serve as a possible stochastic substitute or a stochastic complement to the storm protection provided by the mangroves. We applied the model to a case study based on survey data from 35 villages comprising 500 households in the southwest coastal areas of Bangladesh affected by the most recent severe cyclone of November 2007. Empirical results on the full sample reveal that: (i) the presence of public disaster relief and rehabilitation programs leads to households being willing to invest more in self-insurance but less in self-protection; (ii) households protected by mangroves are more likely to participate in self-protection but less in self-insurance; (iii) the income and size of assets have a strong influence on a household's choice of self-protection but not on self-insurance; and, (iv) middle income households are more likely to participate in self-protection and self-insurance compared to low-income and-rich households; but, once the households decide to participate in private defensive strategies, resources based on their capabilities to implement the defensive strategies.