Working Paper: NBER ID: w30250
Authors: Ruixue Jia; Xiao Ma; Victoria Wenxin Xie
Abstract: Flood events and flood risk have been increasing in the past few decades and have important consequences for the economy. Using county-level and ZIP-code-level data from the United States during 1998–2018, we document that (1) increased flood risk has a large negative impact on firm entry, employment, and output in the long run; and (2) flood events reduce output in the short run while their impact on firm entry and employment is limited. Motivated by these findings, we construct a spatial equilibrium model to characterize how flood risk shapes firms’ location choices and workers’ employment, which we use to estimate the aggregate impact of increased flood risk on the economy. We find that flood risk reduced U.S. aggregate output by 0.52% in 2018, 80% of which stemmed from expectation effects and 20% from direct damages. We also apply our model to study the distributional consequences and forecast the impact of future changes in flood risk. Our results highlight the importance of considering the adjustment of firms and workers in response to risk in evaluating the consequences of natural disasters.
Keywords: Flood Risk; Firm Entry; Employment; Aggregate Output; Climate Change
JEL Codes: F64; Q54; Q56; R11; R13
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| increased flood risk (Q54) | reduced firm entry (L11) |
| increased flood risk (Q54) | reduced employment (J63) |
| increased flood risk (Q54) | reduced real GDP (E20) |
| increased flood risk (Q54) | reduced population size (J11) |
| increased share of flooded areas (Q54) | reduced real GDP (short run) (E20) |
| increased flood risk (Q54) | less business dynamism (L16) |