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

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.