Spillovers that Pay Dividends: The Indirect Impact of Federal Disaster Loans on Firm Entry

Abstract

Disasters increase affected firms’ credit demand. I examine bank lending, firm entry, and recovery following rare flood shocks. After flooding, banks reallocate loan supply toward established incumbents, away from new firms. This reduces region-wide firm entry, entrant job creation, and wages, highlighting young firms’ disproportionate contribution to growth. Low-interest federal loans to disaster-hit incumbents indirectly offset entrants’ credit constraints. This increases firm entry without hurting firm performance, and sustains wages. Consequently, tax revenues compensate for upfront federal spending on business recovery loans. Positive spillovers onto firm entry demonstrate a novel, substantial channel through which government spending supports post-disaster recovery.

Keywords: natural disasters, disaster relief spending, firm entry, bank credit, MVPF