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Financing Recovery After Disasters: Explaining Community Credit Market Responses to Severe Events

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  • Benjamin L. Collier
  • Volodymyr O. Babich

Abstract

Credit provides a means for uninsured households and businesses to manage disaster losses, but access to credit may be tenuous after severe events. Using lender fixed effects models, we examine how natural disasters affect the amount of credit supplied by community lenders in developing and emerging economies. We find that disasters reduce lending. We consider two potential causes of lending reductions: (1) disasters reduce expected returns on loans made after the event or (2) capital constraints (lenders’ difficulty replacing equity lost during the event). We develop a dynamic model that informs our empirical identification of these causes and conclude that capital constraints cause observed credit contractions. We also examine the effects of insurance market development and find evidence that insurance preserves the creditworthiness of borrowers. Our results demonstrate pervasive disaster‐related credit supply shocks in developing and emerging economies and identify new insurance market opportunities.

Suggested Citation

  • Benjamin L. Collier & Volodymyr O. Babich, 2019. "Financing Recovery After Disasters: Explaining Community Credit Market Responses to Severe Events," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 86(2), pages 479-520, June.
    • Handle: RePEc:bla:jrinsu:v:86:y:2019:i:2:p:479-520
    DOI: 10.1111/jori.12221
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    Cited by:

    1. Toshihiro Okubo & Eric Strobl, 2021. "Natural disasters, firm survival, and growth: Evidence from the Ise Bay Typhoon, Japan," Journal of Regional Science, Wiley Blackwell, vol. 61(5), pages 944-970, November.
    2. Jiao Wang & Lima Zhao & Arnd Huchzermeier, 2021. "Operations‐Finance Interface in Risk Management: Research Evolution and Opportunities," Production and Operations Management, Production and Operations Management Society, vol. 30(2), pages 355-389, February.
    3. Vinzenz Peters & Jingtian Wang & Mark Sanders, 2023. "Resilience to extreme weather events and local financial structure of prefecture-level cities in China," Climatic Change, Springer, vol. 176(9), pages 1-21, September.
    4. Tetsuji Okazaki & Toshihiro Okubo & Eric Strobl, 2020. "The Bright and Dark Side of Financial Support from Local and Central Banks after a Natural Disaster: Evidence from the Great Kanto Earthquake, 1923 Japan," Keio-IES Discussion Paper Series 2020-001, Institute for Economics Studies, Keio University.
    5. Yibin Ao & Ling Tan & Qiqi Feng & Liyao Tan & Hongfu Li & Yan Wang & Tong Wang & Yunfeng Chen, 2022. "Livelihood Capital Effects on Famers’ Strategy Choices in Flood-Prone Areas—A Study in Rural China," IJERPH, MDPI, vol. 19(12), pages 1-19, June.
    6. Jaskirat Singh & Dhiraj Sharma & Gurdip Singh Batra, 2023. "Does Credit Utilization Pattern Promote Poverty Alleviation? An Evidence from India," Global Business Review, International Management Institute, vol. 24(6), pages 1227-1250, December.
    7. Benjamin L. Collier, 2020. "Strengthening Local Credit Markets Through Lender‐Level Index Insurance," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 87(2), pages 319-349, June.
    8. Lee, Chien-Chiang & Wang, Chih-Wei & Ho, Shan-Ju & Wu, Ting-Pin, 2021. "The impact of natural disaster on energy consumption: International evidence," Energy Economics, Elsevier, vol. 97(C).
    9. Fu, Zhenqi & Tao, Yunqing, 2022. "Land disasters and farmers’ private credit," Finance Research Letters, Elsevier, vol. 47(PB).

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