Earthquakes, grants, and public expenditure: How municipalities respond to natural disasters

Abstract

We analyze the response of municipalities to the occurrence of natural disasters in terms of spending behavior, use of upper‐tier transfers and recovery, using balance sheet data of about 8,000 Italian municipalities for the period 2000–2015, and the universe of earthquakes events. We find evidence of increasing expenditure for about 12 years after the shocks, with asymmetric responses between earthquake‐related and unconditional grants, and heterogeneous flypaper effects across the country. While in northern municipalities expenditure tends to regress to pre‐earthquake levels, southern municipalities stick to higher expenditure levels when grants drop. This evidence is coupled with a faster recovery of private income and housing prices in northern municipalities.

Local Public Finance Dynamics and Hurricane Shocks

“…Second, local governments can generally rely on state reserve funds (Urahn and Irwin, 2020;Gregory, 2013) and federally-backed insurance like FEMA to pay for damages to physical property in the aftermath of a hurricane (Garrett and Sobel, 2003;del Valle et al, 2019;Masiero and Santarossa, 2020). The availability of federally-backed flood insurance to home owners through the National Flood Insurance Program could also offset negative impacts on house prices or even increase property tax revenues if hurricane disasters stimulate housing re-development (Gaul, 2019;Liao and Kousky, 2020).…”

Earthquake Hazard and Civic Capital

“…In adopting this view, we take a different approach relative to previous research, which has tended to focus on the short-run effects of (mostly) single seismic events. To this regard, scholars have explored saving and spending behavior (Filipski et al, 2019), social capital (Bai and Li, 2021), crime (Hombrados, 2020), religiosity (Sinding Bentzen, 2019), GDP per capita (Barone and Mocetti, 2014), delayed transition to self-government (Belloc et al, 2016), and public expenditures (Masiero and Santarossa, 2020).…”

“…Notably, our approach differs from that employed in previous studies using data on Italian earthquakes (Belloc et al, 2016;Masiero and Santarossa, 2020), in that we do not use the local seismic intensity to assign earthquakes to municipalities, but rather assign municipalities using the spatial distance between the epicenter and the municipal border. There are two reasons for this choice.…”

“…6 While some scholars rely on intensity measures (e.g. Barone and Mocetti, 2014;Belloc et al, 2016;Masiero and Santarossa, 2020), here we adopt a magnitude-based approach for two reasons. First, the intensity of early events is frequently missing in the CPTI15, while their magnitude is always reported.…”

Local public finance dynamics and hurricane shocks

“…property in the aftermath of a hurricane (Garrett and Sobel, 2003;del Valle et al, 2019;Masiero and Santarossa, 2020). The availability of federally-backed flood insurance to home owners through the National Flood Insurance Program could also offset negative impacts on house prices or even increase property tax revenues if hurricane disasters stimulate housing re-development (Gaul, 2019;Liao and Kousky, 2020).…”