Disaster Experience and Governments' Savings: The Moderating Role of Organizational Capacity

The increasing risk of natural and human-induced disasters has caused considerable costs to governments. Governments' savings can function as a mechanism to mitigate such revenue or expenditure shocks due to disasters. While past studies have examined how recessions affect government reserves, to date, few studies have tested how a government's past experiences of natural disasters affect the level of its savings. In this study, we use organizational learning theory as a framework to explain this relationship. We empirically parse out the effect of previous disaster experience on reserve funds (i.e., rainy-day funds) and general savings (i.e., unassigned general fund balance). We further test whether organizational capacity serves as a moderator of the relationship between past disaster experience and savings. For the analysis, this study employs a Generalized Method of Moments (GMM) to examine a sample of US states for the years from 2002 to 2017. We find that an increase in cumulative damage from prior disasters is associated with an increase in rainy-day funds and this relationship is stronger in governments with a high organizational capacity. The results remain robust to estimations with alternative measures. These findings support the organizational learning theory, which suggests that governments learn from their past experiences to increase preparedness for future disasters. We also point out the importance of financial capacity in the process of organizational learning.