Natural Disasters, Institutions, and Economic Recovery: Effects of Hurricane Katrina

Abstract

This study analyzes the effects of Hurricane Katrina on formal and informal institutions in Louisiana, Florida, and Mississippi to provide insights into the recovery trajectories of the states. I use the synthetic control method to construct counterfactual states. I find that the hurricane had large and lingering effects on population and per capita income in all three states, with differing impacts on formal and informal institutions. In Louisiana, the hurricane led to increases in labor market freedom, minimum wage freedom (i.e. deregulation), and property tax freedom (i.e. tax reduction), along with permanent increases in government spending and the government employment. In Florida, it led to decreases in the above three economic freedom indicators, whereas government spending increased. Results for Mississippi indicate a consistent increase in government spending. Moreover, we find that social capital remained robust to the shock in Louisiana, with no pre-treatment fit in Florida and Mississippi.