Association for Public Policy Analysis & Management

Small businesses represent the backbone of the US economy, comprising 99% of all businesses nationwide and employing more than half of the workforce (Yoshida and Deyle, 2005). Small business owners invest a significant amount of resources, time and money to guarantee the success of their ventures, but many of them are extremely vulnerable to natural disasters (Runyan, 2006). Approximately 25 percent of businesses never reopen following a major disaster in the United States (Small Business Administration [SBA], 2014). Primary reasons are lack of preparation ex-ante as well as limited ex-post resources (e.g. credits, disasters assistance) to recover (Alesch et al., 2001). Prior literature has disproportionately focused on individuals, households, public sector impacts, and subsequent adaptation policies.[1] Remarkably little attention has been paid to business disaster impacts and recovery aftermath (Zhang, Lindell and Prater, 2009).

SBA business disaster loans are one of the few ex-post recovery mechanisms available for businesses in the aftermath of a catastrophe. Low interest disaster loans allow firms to repay and replace damaged or destroyed real estate, property, machinery, equipment as well as inventory and other business assets. While low interest loans can potentially foster the recovery process, the financial support may also create additional problems such as increasing debts and may further exacerbate business vulnerabilities (Dahlhamer and Tierney, 1996). Another problem that can arise with subsidized loans is the possibility of promoting unwanted concentration of activities in areas prone to hazards.

We employ zip code business pattern data to understand the effect of SBA disaster loans on small business survival in areas impacted by flood disasters. We estimate the instrumental variable panel data model, in which the net change (quits – entrants) of firms is a function of SBA disaster loans and other county level controls, including unemployment rate, population and industry densities. To address potential endogeneity between the SBA loans and the business establishments, we construct an instrument that captures political motivation of the disaster declaration process in the United States.

Floods represent the costliest natural hazards in the United States and flood-related economic losses are likely to increase in the future under climate change (Melilo et al., 2014). While the loss of a single small business may not create huge disturbances in the local economy, the cumulative loss can have substantial effect given their contribution to overall employment nationwide. Studying the business recovery is thus important for the sustainability and long-term socio-economic livelihood of impacted communities.