Expecting Floods: Firm Entry, Employment, and Aggregate Implications

Ruixue Jia, , and Victoria Xie

No 17462, CEPR Discussion Papers from C.E.P.R. Discussion Papers

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 and exit; Spatial equilibrium (search for similar items in EconPapers)
JEL-codes: F18 Q54 Q56 R11 R13 (search for similar items in EconPapers)
Date: 2022-07
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Working Paper: Expecting Floods: Firm Entry, Employment, and Aggregate Implications (2022)
Working Paper: Expecting Floods: Firm Entry, Employment, and Aggregate Implications (2022)
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