Droughts and Economic Activity: Do Dams and Groundwater Mediate the Impact?

Sheila M. Olmstead and Hilary Sigman

Journal of the Association of Environmental and Resource Economists, 2026, vol. 13, issue 4, 975 - 1010

Abstract: This study examines the effects of droughts on economic activity, proxied by nighttime lights. Using two different indices of drought severity, one remotely sensed and one from ground-sensed meteorological data, we provide some of the first global estimates of the economic effects of drought, as opposed to temperature and precipitation. Economic impacts depend on drought severity, with moderate-or-worse droughts reducing luminosity by about 2%. Water storage in the form of accessible groundwater mitigates drought impacts. Dams moderate the effects of all but the most extreme droughts. For moderate or worse droughts, negative effects are fully offset by the presence of dams, unless some dams are hydroelectric. Upstream dams do not appear to create harmful spillovers for drought resilience downstream. Results are robust to allowing separate mediating impacts from irrigation and suggest that the resilience benefits of dams and groundwater extend beyond agriculture.

Date: 2026
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