Disasters And Development: Natural Disasters, Credit Constraints And Economic Growth
The authors demonstrate, using a simple two-period equilibrium model of the economy, the potential effects of extreme event occurrences - such as natural or humanitarian disasters - on economic growth over the medium-to long-term. In particular, they focus on the effect of such shocks on investment. They examine two polar cases; an unconstrained economy where agents have access to perfect capital markets, versus a credit-constrained version, where the economy is assumed to operate in financial autarky. Considering these extreme cases allows them to highlight the interaction of extreme events and economic underdevelopment, manifested through poorly developed financial markets.