DP RIETI Discussion Paper Series 14-E-055 Natural Disaster and Natural Selection

In this paper, we investigate whether natural selection works for firm exit after a massive natural disaster. By using a unique data set of more than 84,000 firms after the Tohoku Earthquake, we examined the impact of firm efficiency on firm bankruptcy both inside and outside of the earthquake-affected areas. We find that more efficient firms are less likely to go bankrupt both inside and outside of the affected areas, which indicates the existence of natural selection. However, we also find that firms located inside the earthquake-affected areas are less likely to go bankrupt than those located outside of the areas. We also applied the same methodology to the case of the Kobe Earthquake, and find qualitatively similar results