Association for Public Policy Analysis & Management

Natural disasters are shocks to income, wealth, and capital. The US government has a long history of federal assistance following natural disasters. The implicit assumption is that savings, credit markets, and existing insurance are insufficient to smooth the negative financial con-sequences of a natural disaster. We are the first to estimate the causal effect of federal disaster cash grants on post-disaster financial outcomes. We use credit bureau data to analyze very large tornadoes that hit the US from 2002 to 2013 and that have block-level damage maps.

We find that disaster-affected individuals who receive cash grants have $509 less in quarterly credit card debt in the three years after the disaster relative to disaster-affected individuals who did not receive cash grants. The cash grants do not reduce negative financial outcomes such as 90 day delinquency and foreclosure, but do increase migration from the disaster-affected neighborhoods.

Next, we measure the effect of the cash grants on local businesses. There are 15% more establishments and 28% more employees after a disaster in neighborhoods where residents receive cash grants. The increase in the number of establishments is due to a higher survival rate for existing establishments and concentrated among non-manufacturing establishments that rely on local demand.