Does Federal Assistance Crowd Out Private Demand for Insurance?

We undertake an empirical analysis of the effect of disaster aid on the demand for insurance using a unique panel dataset from Florida. We address endogeneity using instrumental variables that exploit political influence over aid amounts. In zip-codes that receive individual assistance grants, the average insurance coverage decreases by about $17,000. When the average grant given increases by $1,000, average insurance coverage declines by about $6,400. This crowding out is on the intensive margin; we find no impact on take-up rates. We control for low interest government loans and find that they have no effect on insurance demand. JEL Codes: D78, D81, G22, Q54 1 Michel-Kerjan thanks the Federal Emergency Management Agency (Recovery Directorate and the Federal Insurance and Mitigation Administration) and the US Small Business Administration for providing the datasets used here. For Kousky and Michel-Kerjan, this work is partially supported by the National Science Foundation under joint Grant No. SES-1062039/1061882. We would like to thank the following people for helpful conversations and comments on previous versions of this work: Wouter Botzen, Jeff Brown, Tatyana Deryugina, Dwight Jaffee, Howard Kunreuther, and Leonard Shabman. We would also like to thank participants in a seminar at Resources for the Future, Wharton and participant in the annual meeting of the American Economic Association.