Living like there’s no tomorrow: The psychological effects of an earthquake on savings and spending behavior

Abstract

Natural disasters impact economies not only through physical damages, but also by affecting survivors emotionally and psychologically. This can alter their economic behavior, in ways that remain poorly understood. We present a model of post-disaster savings that reveals two opposing tendencies: the need to self-insure through increased savings, and the drive to “enjoy life while it lasts” through increased spending. We use panel datasets from China’s Sichuan province, and isolate psychological impacts by focusing on those who lived in quake areas but did not themselves suffer damages or injuries. Although they did not bear economic losses, they saved less, spent more on alcohol, and played majiang (a Chinese game) more often, suggesting that the “no tomorrow” tendency dominated over the precautionary tendency. The magnitude of the savings rate impact, a drop of 0.17 percentage points for each percent of distance closer to the epicenter, is economically significant, and persists in the medium term.