A BURNING QUESTION: DOES ARSON INCREASE WHEN LOCAL HOUSE PRICES DECLINE?

• Published date: 01 March 2017
• Author: Michael D. Eriksen,James M. Carson
• DOI: http://doi.org/10.1111/jori.12089
• Date: 01 March 2017

ABURNING QUESTION:DOES ARSON INCREASE WHEN

LOCAL HOUSE PRICES DECLINE?

Michael D. Eriksen

James M. Carson

ABSTRACT

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.

INTRODUCTION

Arrow (1963) first speculated that economic factors may lead some homeowners to

commit arson on their own property due to moral hazard.

1

While empirical evidence

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. The authors can be contacted via e-mail:

mike.eriksen@ttu.edu, jcarson@uga.edu. The authors express their appreciation and acknowl-

edge helpful comments from Andre Liebenberg and David Russell; from participants at

meetings of the Risk Theory Society, the American Real Estate and Urban Economics

Association, and the Urban Economics Association; from seminar participants at the University

of Nebraska, Illinois State University, and the University of Cincinnati; from colleagues at the

University of Georgia and Texas Tech University; and from the editor and two anonymous

reviewers.

1

Prior research provides evidence of other types of insurance-related consumer behaviors tied

to prevailing economic conditions. For example, mortality-contingent insurance contracts

(e.g., life insurance) experience increases in policy loans and surrenders during times of high

interest rates (Outreville, 1990; Liebenberg et al., 2010).

© 2015 The Journal of Risk and Insurance. Vol. 84, No. 1, 7–34 (2017).

DOI: 10.1111/jori.12089

7

regarding the influence of economic factors on the incidence of property crime is well

established in the prior literature (see Ehrlich, 1996), the relation between economic

conditions and arson is less clear. Volatility of house prices over time, and especially

during the Great Recession, leads naturally to the question of whether declines in

house prices are related to residential fires caused by arson. In this article, we

construct a panel data series of the determined cause of 4.8 million fires that occurred

in the United States between 1986 and 2010 to test whether decreases in local house

prices coincided with increases in arson.

2

Determining whether arson increases when house prices decrease is important given

that arson poses significant danger to human life in neighboring properties and the

firefighters attempting to extinguish the fires. In addition to the threat to human life,

arson also caused at least $684 million in property damage in 2009 according to the

National Fire Prevention Association (NFPA) (Karter, 2010).

3

Given the majority of

these damages were on insured properties, increases in arson would result in higher

losses for insurance companies and eventually higher premiums for policyholders

(Hoyt, 1990).

Our knowledge of whether a relation exists between arson and macroeconomic

conditions is limited to a relatively small number of studies beginning with

Hershbarger and Miller (1978), Spillman and Zak (1979), and Cloninger (1981). This

early research found limited and conflicting evidence using highly aggregated

national arson estimates where other unobserved trends may also be present, as

highlighted by Brotman and Fox (1988). More recently, Goebel and Harrison (2012)

provide cross-sectional evidence of a higher incidence of arson during 2007 in states

with less house appreciation between 2002 and 2006, and it is an important empirical

question as to whether their results generalize to other time periods.

Our analysis complements the cross-sectional results of Goebel and Harrison (2012)

and extends the literature in several ways. First, we assemble and use a novel panel

data series of arson offenses and accidental fires arguably subject to less reporting bias

compared to data from the Uniform Crime Reports (UCR) System used in prior

studies.

4

Second, the panel data set we create allows us to account for area- and time-

2

We focus on declines in house prices (as a proxy for negative equity) conditional upon changes

in other economic factors as Mayer, Pence, and Sherlund (2009) show that recent house price

decreases are highly correlated with the shares of homeowners with negative equity, and due

to the unique role of house prices in economic motives associated with intentional and

accidental fires. We discuss these potential mechanisms in more detail in the next section. In

our analysis of arson and declines in house prices, while it is desirable to include homeowner

insurance policy coverage characteristics, as suggested by a reviewer, our data unfortunately

do not include specific insurance contract information.

3

These estimates most likely represent the lower bound of the actual economic cost of arson

since not all instances of arson may be detected as we discuss later in this article.

4

While the UCR is the most commonly used source of data when analyzing the effect of

economic conditions on criminal offenses, various studies document instances of systematic

reporting bias (Ehrlich, 1996; Levitt, 1997; Raphael and Winter-Ebmer, 2001). This reporting

bias may be due to perceived stigma, political motivations, or police departments having

limited financial resources to submit reports (Ehrlich, 1996).

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