A Demand Curve for Disaster Recovery Loans

Abstract

We estimate and trace a credit demand curve for households that recently experienced damage
to their homes from a natural disaster. Our administrative data include over one million
applicants to a federal recovery loan program for households. We estimate extensive-margin
demand over a large range of interest rates. Our identification strategy exploits 24 natural experiments, leveraging exogenous, time-based variation in the program’s offered interest rate.
Interest rates meaningfully affect consumer demand throughout the distribution of rates. On
average, a 1 percentage point increase in the interest rate reduces loan take-up by 26%. We
find a large impact of applicants’ credit quality on demand and evidence of monthly payment
targeting.

Keywords: Credit Demand, Household Finance, Financial Constraints, Climate Risk, Public Policy

JEL Classification: D12, G51, Q54