The Impact of Natural Disasters on Businesses and Consumers

This project uses detailed data collected in the aftermath of Hurricane Harvey in Texas in 2017 business closures, credit card purchases, business recovery aid data, and innovative modelling to study the effects of natural disasters on businesses and consumer welfare. It also studies how public aid to businesses after a natural disaster should be allocated to minimize the impact of these disasters on businesses and consumers. The research develops a model of consumer choice and firm re-entry to answer three questions: how large consumer welfare losses after the hurricane were, how effective was aid facilitating business re-entry, and what is the optimal way of allocating aid to help businesses recover from disaster. The innovative research design will allow the researchers to answer these questions effectively. The results of this research will guide policymakers in developing disaster response and resilience efforts to strengthen local economies and to mitigate the adverse effects of natural disasters as well as consequences of climate change and help establish the US as a global leader in business recovery policies after a natural disaster. This research project combines granular data on consumer behavior, flooding, and business closures to model and estimate consumer preferences that allows the PIs to quantify welfare losses due to business closures. At the heart of this part of the project is the development and estimation of a discrete choice model that allows the PIs to recover consumer welfare losses. The project then develops a model of firm re-entry decisions to estimate the effectiveness of government aid to help business re-entry, as well as measure heterogeneity in economic impacts across neighborhoods and industries. Finally, the PIs use these estimates to design and evaluate an aid allocation mechanism that distributes business aid to minimize consumer welfare loss from business exit. The results of this research will provide guidance in developing disaster response and resilience policies to strengthen local economies and mitigate the adverse consequences of natural disasters and climate change as well as help establish the US as a global leader in business recovery policies after a natural disaster. This award reflects NSF's statutory mission and has been deemed worthy of support through evaluation using the Foundation's intellectual merit and broader impacts review criteria.