Financial market responses to a natural disaster: Evidence from credit networks and the Indian Ocean tsunami

Kristina Czura*, Stefan Klonner*

*Corresponding author for this work

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Abstract

We examine changes in financial allocations in Rotating Savings and Credit Associations (Roscas), a popular group-based financial institution world-wide, in the aftermath of the 2004 Indian Ocean tsunami. With financial data from locations along the South Indian coast we estimate the causal effect of this major natural disaster on financial flows between occupational groups, the price of credit and other loan characteristics. We find that the supply of funds in these credit networks remained remarkably stable, while demand by small and medium-scale entrepreneurs increased significantly. In response, substantial funds were channeled from wage-employed members and commercial investors to entrepreneurs. We conclude that natural disasters affect individuals with substantial heterogeneity and that the Roscas we study offer more scope for gains from trade in response to a seemingly aggregate shock than commonly assumed for traditional credit and insurance networks.
Original languageEnglish
Article number102996
Number of pages20
JournalJournal of Development Economics
Volume160
Early online date1-Nov-2022
DOIs
Publication statusPublished - Jan-2023

Keywords

  • Risk-sharing, Credit, Roscas, Financial Institutions, Natural Disasters

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