Liquidity and Consumption: Evidence from three post-earthquakes reconstruction programs in Italy

Abstract

In Italian regions hit by earthquakes homeowners typically receive public funds to finance reconstruction. While these funds are strictly tied to reconstruction work, they are in part disbursed upfront, leading to significant variation in cash-on-hand. We exploit this variation to study the effects of liquidity on relatively wealthy households’ consumption. We find a large and significant response in the first year homeowners receive the cash, and provide evidence that this response is driven by illiquid households with bank debt. Instead, we find no evidence that consumption responds to funds paid directly to firms, thus leaving households’ liquidity unaffected.