Econometrica: Mar 2019, Volume 87, Issue 2

Estimation of an Equilibrium Model with Externalities: Post-Disaster Neighborhood Rebuilding

https://doi.org/10.3982/ECTA14246
p. 387-421

Chao Fu, Jesse Gregory

We study the optimal design of subsidies in an equilibrium setting, where the decisions of individual recipients impose externalities on one another. We apply the model to the case of post‐Katrina rebuilding in New Orleans under the Louisiana Road Home rebuilding grant program (RH). We estimate the structural model via indirect inference, exploiting a discontinuity in the formula for determining the size of grants, which helps isolate the causal effect of neighbors' rebuilding on one's own rebuilding choices. We find that the additional rebuilding induced by RH generated positive externalities equivalent to $4950 to each inframarginal household whose rebuilding choice was not affected by the program. Counterfactual policy experiments find that optimal subsidy policies bias grant offers against relocation, with an inverse‐U‐shaped relationship between the degree of bias and the severity of damages from the disaster.



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Supplement to "Estimation of an Equilibrium Model with Externalities: Post-Disaster Neighborhood Rebuilding"

To solve our model numerically, we must impute values for several of the model's exogenous variables we do not observe in our estimation dataset, which covers the full universe of homeowning households in New Orleans when Katrina occurred. This appendix describes our imputation procedures.

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Supplement to "Estimation of an Equilibrium Model with Externalities: Post-Disaster Neighborhood Rebuilding"

This zip file contains the replication files for the manuscript.

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