Government and Nature: Evidence from the Distribution of Flood Damages in China

Abstract

With increasing flood risks, it is increasingly important to understand the impact of government interventions that reallocate flood damages. In 2000, the Chinese government designated 96 Flood Detention Basin (FDB) counties, allocating lower-elevation areas within these counties for temporary floodwater storage. During severe flood events, floodwater may be diverted to these FDB counties to protect downstream urban centers. We evaluate the aggregate and distributional impacts of the FDB policy. Difference-in-differences results show that if a county is selected to the FDB list, county-level firm entry and firm-level fixed asset investments would decrease by 15.9% and 19.7%, respectively. Overall, FDB designation results in a 10.7% reduction in county-level nighttime light intensity. We then develop a spatial general equilibrium model that captures trade linkages among FDB counties, protected cities, and other regions. By comparing the actual output to a counterfactual scenario without FDBs, we find that as FDBs absorb more floodwater, the policy’s output gains increase; however, this comes at the cost of growing inequality between FDB counties and others. In summary, FDBs may improve economic resilience against floods, but the economic cost is taken disproportionately by rural counties.

Keywords: Environment and Development, Regional Development Policy, General Equilibrium and Welfare Analysis, Natural Disasters

JEL Classification: Q54, Q56, R58, R13