Flood risk poses a growing threat to economic activities and real estate in the US. Intuitively,
both residential households and commercial businesses should gradually move out of flood zones,
especially when those areas face increasing flood risk. However, we find a puzzling pattern that
shows businesses in US grew 10% faster in certain central business districts in the past two decades
when those districts were designated as flood zones. We build a spatial model that explains this
puzzle: Business misplacement in response to rising flood risk is due to a free riding problem, in
which flood insurance is imperfectly enforced while governments provide financial aid to uninsured
properties ex post. Our model predicts lower commercial rent after an area becomes a flood zone,
matching price results we obtain from our empirical analysis. Finally, we quantify welfare losses
of imperfect flood insurance enforcement using our model.