The Unintended Consequences of Post-Disaster Policies for Spatial Sorting

Abstract

Post-disaster aid aims to relieve affected communities, but excessive bailouts may encourage economic activity to remain in exposed areas. We provide new empirical and theoretical evidence on the spatial consequences of post-disaster policies related to political motives. Using the exogenous variation in the timing of natural disasters, we show that hurricanes close to Election Day lead to increased post-disaster efforts at the local level and result in increased population sorting into the impacted areas. To quantify and comprehend the implications of this new sorting pattern for the aggregate economy, we introduce the relationship between electoral cycles and post-disaster policies as a new feature in a dynamic spatial general equilibrium model. We show that households respond to current post-disaster policies by sorting in hazard-prone coastal areas. In the short run, current post-disaster policies improve aggregate welfare at the expense of large overall GDP and productivity losses.

Keywords: Natural Disasters, Political Budget Cycles, Spatial Sorting

JEL Classification: Q54, D72, H53, H84