Market response to typhoons: The role of information and expectations

Abstract

AbstractDamages from tropical storms are enormous and predicted to increase with climate change. This study uses high‐frequency data to investigate typhoons' effects through information channels on Taiwan's wholesale vegetable market during the 1996–2014 period. We first identify effects on prices and quantities during storms' striking periods and further separate price effects into those due, respectively, to supply and demand shifts. The results show that for typhoons that make landfall, prices rise significantly during the striking period, and the decomposition results indicate that most of the price effects during periods with warnings but no landfall are due to demand shifts, which supports evidence of precautionary purchases by consumers. However, during the landfall period, the price effect is mainly driven by decreased supply. In addition, we find that typhoon effects differ between specific vegetables, and the magnitude of precautionary purchase is correlated with expected damage to those vegetables. Consumers also make more precautionary purchases when they face higher‐intensity typhoons or learn typhoons will make landfall within 24 h, and such prior information related to intensity or landfall urgency can also amplify early harvest effects by farmers.