Wildfires and the Resilience of Commercial Activity

In this project, we examine the economic repercussions of one prominent extreme weather threat—wildfires. We study how wildfires affect economic activity, focusing on how the resulting damage and increased risk of future fires are borne by commercial establishments in California. While there is a growing body of work at the intersection of disasters and real estate, it has largely focused on flooding- and hurricane-related events and on residential markets. Commercial activity, however, is a critical component of a municipality’s economic and social health, and we know relatively little about how wildfire risk influences decisions to invest in and use commercial infrastructure.

Our results indicate that there is a decline in the number of establishments located inside the fire burn area. This negative effect is most pronounced in the four years following a fire and returns to the pre-fire baseline by year five. The magnitude and persistence of this decline are robust across multiple identification strategies and validation exercises. Evidence indicates that the reduction in establishments is driven primarily by the destruction or damage of businesses and their structures, rather than by a significant withdrawal in local consumption or residential migration due to, for example, heightened perceptions of fire risk.

Further analysis shows that the net decline in establishments is due to increased closure rates rather than reduced opening rates in higher-risk areas. The decline is slower to reverse for smaller and standalone establishments, which may be less resilient in the face of such shocks. We also find that establishments that are more attached to a specific location exhibit greater resilience.

https://www.bschool.cuhk.edu.hk/events/wildfires-and-the-resilience-of-commercial-activity/