Earthquakes and the quality of life in Japan

Japan is famous for its earthquakes. How do households and firms respond to this potentially devastating risk? How does earthquake risk affect housing costs and wages? To answer these questions, we construct a Quality of Life Index (QOLI) and estimate the social cost of earthquake risk among cities/counties in Japan. The regional QOLI is obtained through estimating the hedonic wage and housing rent regressions using household longitudinal data covering all Japan. From the estimated results, we find that earthquake risk has a significant impact on the overall quality of life in Japanese prefectures, and that there are large city/county differences in terms of the social cost of earthquake risk. Finally, we argue that the large regional variation in the social cost of earthquakes arises from earthquake insurance market imperfections - crude and rough geographical risk rating - and propose a possible remedy for enhancing earthquake insurance risk assessment.