Disaster, Aid, and Preferences: The Long-run Impact of the Tsunami on Giving in Sri Lanka

Abstract

Do natural disasters produce effects on preferences of victims in the long run? We test the impact of the tsunami shock on generosity of a sample of Sri Lankan affected/unaffected microfinance borrowers seven years after the event. Specifically, we test the effect of the shock at the extensive margin by comparing damaged with non-damaged individuals in terms of giving and expected giving in a dictator game. Moreover, at the intensive margin, we compare the participants based on the amount of damage experienced and recovery aid received. The advantage of this last comparison is that differences in observables between the groups are minimized. We reduce further identification problems by selecting a random sample of damaged and non-damaged borrowers belonging to the same microfinance organization who are, therefore, likely to share some important common traits that are usually unobservable to researchers. We complete our identification strategy with weighted least squares, instrumental variable estimates and a sensitivity analysis on the exogeneity assumption. The main findings of the paper support the hypothesis that the shock affects participants’ preferences in the long run. First, the tsunami negatively affects generosity at the extensive margin as those who suffered at least one damage give and expect less than those who did not. Second, while large recovery assistance does not directly affect giving and expected giving, it increases especially the latter indirectly, i.e., when interacted with the number of damages. Our results reconcile that part of the literature showing evidence of natural shocks having a detrimental effect on social preferences (Fleming, Chong, Alberto, & Bejarano, 2011; Cassar, Grosjean, & Whitt, 2013) with that supporting, instead, a positive link (Solnit, 2009; Whitt & Wilson, 2007; Cassar, Healy, & Von Kessler, 2011). Furthermore, since our study focuses on the long-run impact of a natural disaster, previous results on short-run effects are not necessarily inconsistent with ours.