Trade Disruption and Risk Perception

In the literature, direct physical damage to individuals caused by natural disasters, such as the destruction of houses, is often found to raise their perception of risks of future disasters. This paper examines whether another type of damage caused by disasters, i.e., indirect economic shocks, also affects the risk perception of individuals who are not directly affected by disasters. For this purpose, we focus on cacao farmers in Indonesia who experienced a disruption in trade with their traders after the 2018 Sulawesi earthquake, and use unique, household-level data collected after the earthquake. We find that when farmers were not directly or physically hit by the earthquake, but could not sell their products to their traders for a longer period of time due to the destruction of transport infrastructure and warehouses, they were more likely to perceive a very high risk of future earthquakes in their vicinity. In addition, farmers facing a longer trade disruption tended to believe that the risk of earthquakes is higher than that of other types of natural disasters. These findings imply that the effect of a disaster on individuals’ risk perception propagates geographically through trade networks to regions that are not directly affected by the disaster because of indirect and economic damage.