Major Earthquake Experience and Presently-Gratifying Expenditures

Abstract

Major natural disasters are often life-changing events, capable of potentially altering the economic behavior of those who experience it first-hand. We investigate the impact of experiencing a major earthquake on individuals’ investment and consumption expenditure shares using the major earthquakes in China from 1920 to 2008. We focus on the hypothesis that first-hand experience with a major earthquake influences consumption towards presently gratifying items and experiences. A theoretical framework is provided in which the attraction of current consumption is heightened by direct experience with previous near-fatal events. We compare the expenditure patterns of individuals who began residing in earthquake-stricken areas in China directly before a major earthquake with those who began their residence in the area directly afterwards. Numerous robustness checks and placebo tests in the context of China’s institutional migration regulations, are conducted to provide confidence in the identification approach. On average, individuals who experienced a major earthquake early in life tend to invest less in human capital, while spending more on entertainment, conspicuous consumption, health enhancements and convenience services during their subsequent years as household heads. Our study makes progress in understanding the factors which explain long term behavioral heterogeneity in spending and investment tendencies.