Panel Paper: The Effect of Federal Assistance on Household Finance and Business Survival after a Natural Disaster

Thursday, November 8, 2018
Johnson - Mezz Level (Marriott Wardman Park)

*Names in bold indicate Presenter

Justin Gallagher, Case Western Reserve University, Daniel A. Hartley, Federal Reserve Bank of Chicago and Shawn Rohlin, Kent State University

The US government has a long history of federal assistance following natural disasters. The implicit assumption is that cash savings, credit markets, and existing insurance are insufficient to smooth the negative financial consequences of the natural disaster. Several recent studies have, for the first time, estimated person-level financial outcomes following natural disasters in the US using large administrative datasets (Deryugina et al. 2018; Gallagher and Hartley 2017; Groen et al. 2017). These studies all conclude that the average net financial effect of a large disaster is modest and short-lived. However, none of these papers are able to isolate the role that federal disaster assistance has on post-disaster outcomes.

There are two goals of this study. First, we estimate the causal impact of person-level federal disaster grants on post-disaster financial outcomes using credit agency data. Second, we measure the effect of the cash grants on local businesses. We hypothesize that cash grants may act as a targeted stimulus to local businesses.

The Presidential Disaster Declaration process is the main mechanism for direct federal natural disaster assistance in the US. The program we study is called Individual Assistance. Disaster-affected individuals receive cash grants immediately following the disaster. Assistance is linked to incurred damage (e.g. structural damage to the home) and expenses (e.g. temporary housing and relocation) caused by the disaster. Disaster-affected individuals can receive up to approximately $33,000 (GAO 2006).

There are two main identification challenges that limit causal analysis of disaster-based grants. The first concern is that cash grants may be more likely following larger, more damaging disasters. We address this concern by limiting our analysis to large tornadoes that hit the US which have detailed tornado damage maps. Second, cash assistance may be made available only when more vulnerable populations are affected. We find evidence that victims of Individual Assistance tornadoes are of lower socio-economic status than victims of tornadoes without cash assistance. We address this second concern through a triple difference econometric model. Provided that the population hit by a tornado is similar to the “near miss” population, then differencing outcomes for these populations will control for differential trends in e.g. credit card debt between those affected by tornadoes with and without cash assistance.

Preliminary results indicate that disaster-affected individuals who receive cash grants have approximately $2,000 less in quarterly credit card debt after the disaster relative to disaster-affected individuals who did not receive cash grants. The reduction in credit card debt persists for a number of years, consistent with evidence on the persistence of revolving credit card debt. There is no evidence that disaster grants affect other forms of debt or indicators of financial health.

The number of establishments in disaster-affected neighborhoods where residents receive cash grants increases by between 5% and 13%. The larger estimate limits the analysis to those neighborhoods that suffered the worst damage. Self-reported sales from establishments in the worst-affected neighborhoods where local residents receive cash grants increase by 82% relative to establishments in similarly damaged neighborhoods where residents do not receive cash grants.