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Expecting Floods: Firm Entry, Employment, and Aggregate Implications

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  • Jia, Ruixue
  • Ma, Xiao
  • Xie, Victoria Wenxin

Abstract

Flood events and flood risk have been increasing in the past few decades and have important consequences on the economy. Using county-level and ZIP-code-level data during 1998–2018 from the U.S., we document that (1) increased flood risk has large negative impacts on firm entry, employment and output in the long run; (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 percent in 2018, 80% of which stemmed from expectation effects and 20% from direct damages. We also apply our model to studying the distributional consequences and forecasting 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.

Suggested Citation

  • Jia, Ruixue & Ma, Xiao & Xie, Victoria Wenxin, 2022. "Expecting Floods: Firm Entry, Employment, and Aggregate Implications," MPRA Paper 112367, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:112367
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    Cited by:

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    2. Jakob Lehr & Katrin Rehdanz, 2023. "The Effect of Temperature on Energy Use, CO2 Emissions, and Economic Performance in German Industry," CRC TR 224 Discussion Paper Series crctr224_2023_489, University of Bonn and University of Mannheim, Germany.
    3. Hao Dong & Tao Li, 2023. "Climate Economics and Finance: A Literature Review," Climate Economics and Finance, Anser Press, vol. 1(1), pages 29-45, November.
    4. Jacopo Ponticelli & Qiping Xu & Stefan Zeume, 2023. "Temperature and Local Industry Concentration," Working Papers 23-51, Center for Economic Studies, U.S. Census Bureau.
    5. Yu, Weihua & Hu, Jingjing & Deng, Chenchen, 2024. "Overflowing waters, diluted investments: The enduring impact of historical Yellow River floods on enterprise fixed assets investments," Journal of Asian Economics, Elsevier, vol. 92(C).
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    7. Bennedsen, Morten & Larsen, Birthe & Schmutte, Ian M. & Scur, Daniela, 2023. "The effect of preserving job matches during a crisis," Labour Economics, Elsevier, vol. 84(C).
    8. Chabot, Miia & Bertrand, Jean-Louis, 2023. "Climate risks and financial stability: Evidence from the European financial system," Journal of Financial Stability, Elsevier, vol. 69(C).

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    More about this item

    Keywords

    flood risk; flood events; productivity damage;
    All these keywords.

    JEL classification:

    • Q5 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics
    • R1 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General Regional Economics

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