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Small Business Economics

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13.03.2020

Massive earthquakes, risk aversion, and entrepreneurship

verfasst von: Guido de Blasio, Maria De Paola, Samuele Poy, Vincenzo Scoppa

Erschienen in: Small Business Economics | Ausgabe 1/2021

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Abstract

This paper investigates the impact of risk attitudes on the decision to become an entrepreneur. In contrast to previous research, we handle endogeneity issues relying on an instrumental variables strategy considering as a source of exogenous variation in risk aversion the early exposure to a massive earthquake. Using several waves of the Bank of Italy Survey of Household Income and Wealth (SHIW), we find that individuals experiencing an earthquake are significantly more risk averse. Second-stage estimates show that risk aversion has a significant negative impact on the probability of becoming an entrepreneur. A large number of robustness checks confirm our main findings.

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Categorized approximately as massive events (at least level VIII) in the Modified Mercalli Intensity Scale.

A number of other papers exploit instead exposure to traumatic events such as violence (Callenn et al. 2014; Jakiela and Ozier 2019; Moya 2018) and loss of relatives (Bucciol and Zarri 2015) to investigate changes in attitudes toward risk and in risk taking behaviors.

Bernile et al. (2017) examine the relation between CEO early-life exposure to fatal disasters and the subsequent corporate financial and investment policies they adopt. They show that CEOs who have suffered very negative effects from natural disasters behave more conservatively, while CEOs who have experienced disasters without extremely negative consequences lead firms that behave more aggressively.

The reference person is identified with the person responsible for the household budget (or most knowledgeable about it).

The US Survey of Consumer Finances includes a similar a question.

More precisely, individuals are asked the following question: “Imagine you can take part in a lottery in which for every euro invested, you can either double your money (win 1 euro) or lose half of it (lose 50 cents), depending on the toss of a coin (tails you win, heads you lose). How much money would you invest?”

A positive and highly statistically significant correlation is found also between Risk Aversion and a dummy variable Refuse Investment which takes the value of 1 for respondents who refuse to invest any money and 0 otherwise.

We do not consider “craftsmen/professionals” and “workers of family firms” as entrepreneurs since even if they are self-employed they are not employers of other workers and their risk bearing is limited.

The median depth of earthquakes events is 10 km.

The Moment Magnitude scale is a development of the Richter scale. For medium-size earthquakes events (the vast majority in our case), the size of earthquakes measured by the Moment Magnitude scale or by the Richter scale basically does not differ (see Hanks and Kanamori 1979).

The relation between the size of earthquakes and Mercalli scale categories commonly adopted is detailed for example in Tendürüs et al. (2010). Notice that Mercalli scale refers to physical damages to buildings and natural environment and does not consider changes in risk-attitudes or other individual psychological reactions.

We use the limit of 5.7 Mw (and not of 6.0 Mw as required by standard classification) to take into account the measurement error of 0.25 Mw suggested by Locati et al. (2016).

The most destructive earthquake ever occurred from the 1900s in Italy is the one that hit the regions of Sicily and Calabria in 1908 when a 7.1 Mw sized earthquake caused 90,000 victims in the two cities of Messina and Reggio Calabria. In more recent years, a strong earthquake occurred in Irpinia-Basilicata (1980), with almost 2600 individuals having lost their lives. In 2009 another earthquake has struck Abruzzo with 309 victims, 1600 injured, and about 80,000 displaced people.

We inverted the original scale.

A radius of 50 km roughly corresponds to the “crater”, which is the area damaged from a given seismic episode.

We checked if the “movers”—the individuals that we drop from the sample because they live in a different province from that of birth—are different from the “stayers” in terms of risk-aversion and we did not find any significant difference.

We are very conservative on this issue, especially considering that Porcelli and Trezzi (2019) for Italian provinces find that the impact of earthquakes on output and employment tend to be small or negligible. Moreover, they find that the effects are non-persistent and are reabsorbed within 2 years.

Istituto Gugliemo Tagliacarne, Unione Italiana delle Camere di Commercio.

Our results are however rather insensitive to using the survey weights.

From the first-stage equation, analyzing the impact of earthquakes on risk aversion measured using the Arrow–Pratt index of absolute risk aversion, we find results that are similar to those reported in the paper.

While the proportion of female entrepreneurs is much lower than that of male entrepreneurs, when one controls for risk-aversion and for education the gender difference tend to become not significant.

To be more precise, respondents are asked the following question: “You have won the lottery and will receive a sum equal to your household’s net yearly income. You will receive the money in a year’s time. However, if you give up part of the sum you can collect the rest of your win immediately.” The available alternatives regarding the percentage of the sum that respondents would be willing to give up are 0, 2, 3, 5, 10, or 20%.

We have checked whether experiencing an earthquake affects individual intertemporal preferences and we found that an earthquake tends to increase impatience only in a very simple regression. However, when we use individual controls the effect of an earthquake becomes not significant corroborating the evidence that measures of time preferences are relatively stable over time (Meier and Sprenger 2015; Wolbert and Rield 2013).

We are not able to include municipal or provincial fixed effects since the exposure to earthquakes is almost at this level (we consider earthquakes within 50 km from the municipality of residence and we assume that its effect on an individual are long-lasting once one has been exposed to an earthquake). Therefore, we do not have enough variability over time for individuals within the same municipality or the same province.

These estimates have to be interpreted with caution since almost everyone (90%) in our sample has experimented an intermediate earthquake.

Given the nature of our dependent variable we have also estimated the previous specifications with an Ordered Probit estimator. We find results very similar to the OLS estimates (results not reported to save space). We also use the dummy Risk Averse instead of the four-categories variable Risk Aversion. We again find very similar results.

In the period covered by our data (2004–2014) two massive earthquakes occurred in Italy: in 2009 in Abruzzo and in 2012 in Emilia Romagna.

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Titel: Massive earthquakes, risk aversion, and entrepreneurship
verfasst von: Guido de Blasio
Maria De Paola
Samuele Poy
Vincenzo Scoppa
Publikationsdatum: 13.03.2020
Verlag: Springer US
Erschienen in: Small Business Economics / Ausgabe 1/2021
Print ISSN: 0921-898X
Elektronische ISSN: 1573-0913
DOI: https://doi.org/10.1007/s11187-020-00327-x

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