Disasters, Capital, and Productivity

• In Event: Environmental Risks and Disasters: Considerations of Justice and Productivity

Abstract

The fixed nature of physical capital could delay adjustment to rapidly occurring climate shocks. Prior theoretical work predicts this would amplify economic damages from climate change as global warming intensifies disaster risk. Using rich confidential microdata from the US Census Bureau, I establish novel causal evidence on how manufacturing firms readjust their capital, particularly their machinery, in response to large, federally declared floods. While floods degrade capital, surviving plants replace capital and see higher productivity because they upgrade technology as they rebuild. I document substantial reallocation of second-hand capital across plants following floods, notably from low-productivity exiters toward well-performing young plants. Ultimately, capital adjusts relatively quickly, and is reallocated toward better use following flooding, boosting aggregate productivity. These outcomes stem from the expanded credit access that federal disaster spending creates. My findings reveal a new channel through which government disaster spending revives disaster-hit economies and underscore its critical importance in a warming world.

Author

• Tarikua Erda, New York University
  Presenting Author