The impact of earthquakes on economic activity: evidence from Italy

Although earthquakes are large idiosyncratic shocks for affected regions, little is known of their impact on economic activity. Seismic events are rare, the data are crude (the Richter scale measures the magnitude, but says nothing of the associated damages), and counterfactuals are often entirely absent. Using a geophysical methodology devised to gauge seismic damages (the so-called Mercalli scale), we study the evolution of output and employment following seismic events in 95 Italian provinces from 1986 to 2011 for a total of 22 earthquakes. Our identification strategy relies on ideal counterfactuals: ex ante identical neighboring provinces that only differ ex post in terms of damages. We show that following an earthquake, the observed contraction of output and employment is generally small or even negligible. In some cases, the net effect on output and employment can be positive because the stimulus from the reconstruction activities more than compensate for the destruction of physical capital. Finally, we show that the effects on economic activity are nonpersistent, do not spill over from the epicentral region to the neighbors, and tend to be reabsorbed within 2 years from the event.