Rails, Risks, and Resilience: A Dynamic Spatial Equilibrium Analysis with Natural Disaster Risks

We present a dynamic, stochastic, and spatial model that incorporates disaster risk to study the role of local aggregate risks and moving frictions in the spatial economy. A disaster temporarily reduces regional productivity and suspends transportation networks. The model is applied to the analysis of Japan’s Tokai Trough Earthquake (TTE) and maglev train project. Estimation is based on sufficient statistics of future expected values by future migration flows and novel data on rail network disruption from the 2011 Tohoku earthquake. The TTE risk reduces welfare not only in vulnerable regions close to the expected epicenter but also in more distant regions, revealing the regional spillover effects of the disaster risk. The maglev train project increases welfare by 1.6\% on average, with effects that are larger in the north-east regions under the economy with TTE risk, highlighting the distributional effect under the disaster risk.