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Department ofEconomics


Expecting Floods: Firm Entry, Employment,and Aggregate Implications

Victoria Wenxin Xie, Ruixue Jia, and Xiao Ma

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Flood events and flood risk have been increasing in the past few decades and haveimportant consequences on the economy. Using county-level and ZIP-code-level dataduring 1998–2018 from the U.S., we document that (1) increased flood risk has largenegative impacts on firm entry, employment and output in the long run; (2) floodevents reduce output in the short run while their impact on firm entry and employmentis limited. Motivated by these findings, we construct a spatial equilibrium model tocharacterize 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% ofwhich stemmed from expectation effects and 20% from direct damages. We also applyour model to studying the distributional consequences and forecasting the impact offuture changes in flood risk. Our results highlight the importance of considering theadjustment of firms and workers in response to risk in evaluating the consequences ofnatural disasters.

LSB Research, ECON, Victoria Wenxin Xie, Working Papers