Changes in durable stocks, portfolio allocation, and consumption expenditure in the aftermath of the Kobe earthquake Yasuyuki Sawada • Satoshi Shimizutani Received: 17 May 2010 / Accepted: 19 April 2011 / Published online: 8 May 2011 Ó Springer Science+Business Media, LLC 2011 Abstract To understand the household recovery process from unexpected serious damage caused by a natural disaster, we analyze household data from the Kobe earth- quake in 1995. We address three questions—how damaged stocks of durable wealth are reinvested, how an ex post portfolio of borrowing or dissaving is reallocated to diversify the asset shocks caused by the disaster, and how formal and informal consumption insurance mechanisms are effective for amending home damage—all of which have been largely unanswered. We obtain three findings. First, people respond to negative income changes and housing damage by reinvesting damaged wealth. Second, house- holds borrow extensively to amend the large housing damage caused by the earthquake. However, they dissave only for minor household asset damage. Third, consumption smoothing is not achieved for nondurable goods that are significantly affected by negative income changes and household asset damage. These findings suggest that asset shocks caused by a large natural disaster are not sufficiently diversified for households, indicating a large gap in designing effective insurance mechanisms. Keywords Natural disasters  Rebuilding durable stocks  Consumption risk-sharing  Portfolio allocation  Earthquake  Nonseparability JEL Classification D12, D52  E21 This paper was written before the outbreak of the Great East Japan earthquake in March 2011. Y. Sawada Faculty of Economics, University of Tokyo, 7-3-1 Hongo, Bunkyo-ku, Tokyo 113-0033, Japan e-mail: sawada@e.u-tokyo.ac.jp S. Shimizutani (&) Institute for International Policy Studies (IIPS), Toranomon 30 Mori Bldg., 6F Toranomon, 3-2-2 Minato-ku, Tokyo 105-0001, Japan e-mail: sshimizutani@iips.org 123 Rev Econ Household (2011) 9:429–443 DOI 10.1007/s11150-011-9124-7