Shock me like a Hurricane: how Hurricane Katrina changed Louisiana's formal and informal institutions

Abstract

Institutions matter for postdisaster recovery. Conversely, natural disasters can also alter a society's institutions. Using the synthetic control method, this study examines the effects that Hurricane Katrina (2005) had on the formal and informal institutions in Louisiana. As measures of formal institutions, we employ two economic freedom scores corresponding to government employment (GE) (as a share of total employment at the state-level) and property tax (PT). These measures serve as proxies for the level of governmental interference into the economy and the protection of private property rights respectively. To assess the impact on informal institutions, we use state-level social capital data. We find that Hurricane Katrina had lasting impacts on Louisiana's formal institutions. In the post-Katrina period, we find that actual Louisiana had persistently higher economic freedom scores for both GE and PT than the synthetic Louisiana that did not experience the hurricane. These findings imply that the hurricane led to a reduction in both PTs and GE, which indicates a decrease in the relative size of the public sector as a share of the state's economy. On the other hand, we find no impact on our chosen measure of informal institution.

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“…Empirical studies of informal institutions confi rm those institutions' role in many areas such as economic development (Aron, 2000;Casson, Della Giusta, Kambhampati, 2010;Cunningham, Dibooglu, 2020, pp. 166-175;Glaeser et al, 2004;Knack, Keefer, 1997;Lipsey, 2009;Tabellini, 2010;Williamson, 2009) but also in specifi c problems of effi ciency in certain areas, e.g., securing property rights (Williamson, Kerekes, 2011), response to shocks and disasters (Bentkowska, 2021;Paniagua, Rayamajhee, 2022;Rayamajhee et al, 2024;Storr, 2021), impeding or supporting entrepreneurship (Frølund, 2021;Nabisaalu, Bylund, 2021;Smith, Brownlow, 2022), income inequality (Chong, Gradstein, 2019), and informal economy expansion (Gërxhani, Cichocki, 2023;Odera, 2013;Webb et al, 2009). Nevertheless, the studies are confi ned to a narrow operationalisation of informal institutions and primarily relate to a single variable or a scant set.…”

Informal Institutions – Measurement and Comparison in European Countries

“…Empirical studies of informal institutions confi rm those institutions' role in many areas such as economic development (Aron, 2000;Casson, Della Giusta, Kambhampati, 2010;Cunningham, Dibooglu, 2020, pp. 166-175;Glaeser et al, 2004;Knack, Keefer, 1997;Lipsey, 2009;Tabellini, 2010;Williamson, 2009) but also in specifi c problems of effi ciency in certain areas, e.g., securing property rights (Williamson, Kerekes, 2011), response to shocks and disasters (Bentkowska, 2021;Paniagua, Rayamajhee, 2022;Rayamajhee et al, 2024;Storr, 2021), impeding or supporting entrepreneurship (Frølund, 2021;Nabisaalu, Bylund, 2021;Smith, Brownlow, 2022), income inequality (Chong, Gradstein, 2019), and informal economy expansion (Gërxhani, Cichocki, 2023;Odera, 2013;Webb et al, 2009). Nevertheless, the studies are confi ned to a narrow operationalisation of informal institutions and primarily relate to a single variable or a scant set.…”