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

We analyze the response of municipalities to the occurrence of natural disasters (earthquakes) in Italy, in terms of spending behavior, use of upper tier transfers and recovery. We find evidence of increasing expenditure for about 12 years after the shock, with asymmetric responses between matching (earthquake-related) and unconditional grants, and heterogeneous flypaper effects across the country. While in Northern municipalities expenditure tends to regress to pre-treatment levels, i.e., before the earthquake occurrence, Southern municipalities react to the drop of grants showing inertia in expenditure levels. This evidence is coupled with a faster recovery of private income and housing prices in Northern municipalities. Our analysis exploits balance sheet data of about 8000 municipalities for the period 2000-2015 and encompasses the universe of earthquake events defined using alternative intensity measures. We apply a matching approach to disentangle earthquake-related grants (mostly matching grants) from other grants, and to define a control group of non-treated municipalities. The spatial and temporal variation in expenditure and transfers between treated and not-treated governments are then examined using panel data models on the universe of municipalities as well as on a matching sample of municipalities.