Risk Aversion, Inequality and Economic Evaluation of Flood Damages: A Case Study in Ecuador

Abstract: While floods and other natural disasters affect hundreds of millions of people globally every year, a shared methodological approach on which to ground impact valuations is still missing. Standard Cost-Benefit Analyses typically evaluate damages by summing individuals’ monetary equivalents, without taking into account income distribution and risk aversion. We propose an empirical application of alternative valuation approaches developed in recent literature, including equity weights and risk premium multipliers, to a case study in Ecuador. The results show that accounting for inequality may substantially alter the conclusions of a standard vulnerability approach, with important consequences for policy choices pertaining damage compensation and prioritization of intervention areas.