The Economics of Disaster Relief

• DOI: http://doi.org/10.1111/lapo.12036
• Date: 01 July 2015
• Author: Giuseppe Dari‐Mattiacci,Michael G. Faure
• Published date: 01 July 2015

The Economics of Disaster Relief

GIUSEPPE DARI-MATTIACCI and MICHAEL G. FAURE

We distinguish among three types of actions that can be taken to alleviate the

consequences of natural disasters: precautionary efforts (made ex ante), relief

efforts (made in the immediate aftermath of a disaster), and recovery efforts

(made ex post). We argue that recognizing this distinction lessens many of the

problems that the literature attributes to government intervention and hence

expands the scope of government action following disasters. Relief is less likely

than recovery to generate over-supply by the government and over-reliance by

victims.

I. INTRODUCTION

Government intervention in relation to catastrophic events has a poor

reputation. It is criticized in the literature for being excessive ex post and

insufficient ex ante. Often, ex post intervention could be efficiently substi-

tuted by cheaper measures taken before the disaster. For instance, prior to

hurricane Katrina there was a lack of investment in Louisiana’s levee

systems, inadequate zoning regulations, and an absence of emergency plan-

ning (Houck 2006; Waugh 2005), but various government authorities “par-

ticipated in the race to provide relief” ex post, with costs of over $100 million

(Depoorter 2006, 112). The same story can be told of hurricane Irene, which,

a few years later, destroyed homes, businesses, and roads, and caused over

$15 billion in damage. The flood had these disastrous effects because of

unregulated human activities, such as the armoring of the rivers, the hard-

ening of flood plains, and the development of watersheds (Pidot 2012).

Yet government intervention is crucial, not only to alleviate the immediate

consequences of disasters, but also to reduce their long-term effects

(Noy 2009). Thus, understanding the causes for the failure of government

G. Dari-Mattiacci gratefully acknowledges financial support from the Netherlands Organization

for Scientific Research (NWO VIDI grant 016.075.332). The authors would like to thank the

editor Nancy Reichman, three anonymous referees, Mergherita Saraceno, Avi Tabbach, and

Josephine van Zeben for valuable comments, and Liu Jing, Liao Wenqing, Andrea Rigamonti,

and Wang Hui (Maastricht) for valuable research assistance.

Address correspondence to Giuseppe Dari-Mattiacci, Amsterdam Center for Law and Eco-

nomics, University of Amsterdam, Plantage Muidergracht 12, 1018 TV, Amsterdam, the

Netherlands. Telephone: +31 20 525 7157; Email: gdarimat@uva.nl.

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LAW & POLICY, Vol. 37, No. 3, July 2015 ISSN 0265–8240

© 2015 The Authors

Law & Policy © 2015 The University of Denver/Colorado Seminary

doi: 10.1111/lapo.12036

intervention is crucial to better disaster management. The evidence points to

politics and strategic reactions to the prospect of disasters as the sources of

the above-mentioned problems. Politicians usually have short time horizons

and tend to avoid thinking about low-probability events until they occur

(Kunreuther 2010a). Precautionary expenditures generate immediate costs

and thus put pressure on the public budget while producing gains only if a

disaster materializes, that is, in a very small percentage of the cases. More-

over, a disaster that causes little damage is likely to go largely unnoticed,

thereby further reducing the political gains of precautionary efforts; invisible

and improbable gains are traded against conspicuous and sure costs

(Depoorter 2006). Ex post intervention, instead, provides a salient occasion

for political visibility and is likely to be used as a stage for political

campaigns. Because recovery efforts are very visible, political entities will

compete to provide them, leading to excessive expenditures ex post. There are

high political (electoral) rewards attached to ex post intervention, and recent

evidence shows a correlation between elections and realized ex post expen-

ditures; disasters occurring in election years attract more ex post funding

relative to disasters in other years (Michel-Kerjan 2010). Research has also

shown that, in the United States, the Federal Emergency Management Agen-

cy’s (FEMA) disaster expenditures are higher in states that have congressio-

nal representation on FEMA oversight committees. Half of all disaster relief,

the research shows, is motivated by politics rather than altruism (Garrett,

Marsh, and Marshall 2006; Garrett and Sobel 2003). In addition, popular

beliefs and news coverage tend to overstate the risk of looting, anarchy, and

violence in disaster areas. Therefore, politically motivated intervention might

put too much weight on these news-sensitive problems and hence divert

resources away from humanitarian intervention (Sun 2011a).

Leveraging this criticism, law and economics scholars have forcefully

argued against ex post government intervention (see, among many others,

Epstein 1996; Kaplow 1991). The point that we develop in this article is that

the arguments made in the literature against government intervention hold

for recovery (compensation) but not for immediate disaster relief. Thus, we

aim to carve out a broader scope for government intervention than that

advanced in extant analyses. We first argue that a distinction should be made

between three classes of activities involved in disaster management: precau-

tion, relief, and recovery. Precautionary efforts are made ex ante (at time −1),

often months or even years before a disaster strikes; relief efforts are made in

the immediate aftermath of a disaster (at time 0); and recovery efforts are

made ex post (at time +1), after the disaster, and are intended to return

conditions to those that prevailed ex ante. A somewhat similar distinction is

made by Mileti (1999) among preparedness, response, and recovery.

We argue that there are strong reasons for immediate, ad hoc disaster relief

by the government. The need for rapid action, combined with economies of

scale and the public good character of immediate disaster relief, increases the

scope for government intervention and mitigates the inefficiencies, noted

Dari-Mattiacci and Faure DISASTER RELIEF 181

© 2015 The Authors

Law & Policy © 2015 The University of Denver/Colorado Seminary