Weathering an Unexpected Financial Shock: The Role of Federal Disaster Assistance on Household Finance and Business Survival

Abstract

First, we document the impact of being hit by a devastating tornado on household finance and business survival. The tornado paths are random and cannot be predicted using risk information. Individuals in severely damaged Census blocks have a small reduction in debt and no change in bill delinquency. The business establishment survival rate declines by 9%. Second, we provide insight on the role of federal disaster assistance, which includes direct cash assistance to disaster victims and grants to repair public infrastructure, in mitigating the shock. Individuals in severely damaged blocks have 30% less credit card debt post-disaster when disaster aid is available. Migration from damaged blocks increases. Credit-constrained victims have lower bill delinquency and increase consumption. Disaster assistance is a place-based policy and results in 9% more establishments and 14% more employees post-disaster in the average-damaged neighborhood. These effects are concentrated among small non-manufacturing establishments that rely on local demand.

Keywords: Natural disasters, households finance, regional economic activity

JEL Classification: D14, Q54, R11