Sunday, September 27, 2015

A Burning Question: Does Arson Increase When Local House Prices Decline?

We construct panel data on house prices and the determined cause of 4.8 million individual fires in the United States between 1986 and 2010 to test whether decreases in local housing market prices coincided with increases in arson. Since some insured homeowners may attempt to disguise the actual cause of fire as accidental, we also examine how decreases in local house prices are associated with changes in the total number of fires and the probability of determined causes of accidental fires. For the sample period, our results suggest that declines in local house prices coincided with increases in arson, the total number of fires, and the probability that fires were determined to occur due to arson and misuse. We provide further support for the existence of such an effect with empirical evidence that the relation between declines in house prices and arson is stronger in states that allow mortgage lender recourse.

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By:  Michael D. Eriksen is an Assistant Professor of Finance, Rawls College of Business, Texas Tech University, Lubbock, TX 79409. James M. Carson is the Daniel P. Amos Distinguished Professor of Insurance, Department of Insurance, Legal Studies, and Real Estate, Terry College of Business, University of Georgia, Athens, GA 30602

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