Abstract

We study the indirect economic consequences of natural disasters for households using high-quality household-level data from Norway. Universal natural disaster insurance in this setting fully compensates direct physical damages, allowing us to isolate indirect effects. Linking a municipality-level measure of disaster severity to detailed transaction data measuring household expenditures, and using a matched difference-in-differences design, we find large and persistent effects on consumption: the cumulative spending fall up to four years after an event amounts to as much as 45 percent of the direct damages. Population-wide administrative records on income, wealth, housing transactions, and labor-market outcomes allow us to uncover the underlying mechanisms. First, labor income falls while unemployment increases after disasters, particularly when damages are concentrated among firms, consistent with disruptions to local labor markets. Second, housing wealth declines persistently, and homeowners cut spending more than renters despite similar income losses. Our results show that the household costs of natural disasters extend beyond the insured value of destroyed property, as households remain exposed to losses transmitted through local labor and housing markets.