Let the Rich Be Flooded: The Distribution of Financial Aid and Distress after Hurricane Harvey
57 Pages Posted: 13 Jun 2019 Last revised: 25 Jan 2021
Date Written: May 30, 2019
Outside of flood hazard zones, households must decide whether to insure or rely on disaster assistance to manage flood risk. We use the quasi-random flooding generated by Hurricane Harvey, which hit Houston in August 2017, to understand the implications of flood losses for households at different points in the wealth distribution. We begin by characterizing the allocation of SBA disaster loans and FEMA grants as regressive. For example, homeowners in financially constrained areas – those with the greatest need for liquidity – took in 49% less in SBA loan dollars. In turn, heavy flooding increased the bankruptcy rate in these same areas by 1.4 percentage points (or 39%) relative to similar areas that did not flood. Delinquency follows a similar pattern. In contrast, the least constrained flood victims see a relative decrease in their delinquent debt after flooding – consistent with SBA loans acting as a liquidity infusion. Flood insurance, unlike disaster assistance, mitigates the credit impact of flooding across the wealth distribution. Our results highlight that averages mask important heterogeneity after disasters, which challenges existing narratives of how effectively Federal disaster programs absorb financial shocks.
Keywords: inequality, financial constraint, bankruptcy, student debt, natural disaster, FEMA, SBA, wealth effects
JEL Classification: Q54, H84, D0, D1, R2
Suggested Citation: Suggested Citation