negative impacts on growth in the short run, and such negative effects are larger if the country has low levels of human capital (Noy, 2008). However, these studies only discuss the loss of physical and human capital due to disasters and the impacts of post-disaster investments and capital inflow (reconstruction efforts) on economic growth. The impacts on ex-ante investment behavior are outside the scope of these papers.

The likelihood of damages due to natural hazards affects the expected returns to investments, and can therefore determine investment behavior in the long run. Dercon and Christiaensen (2007) show that the high likelihood of harvest failure discourages the application of fertilizer in Ethiopian agriculture, causing inefficiency in production choices.

If household activities go beyond agriculture, the implications of high disaster probabilities may encourage transition to non-agricultural activities that require human capital. For example, if physical capital such as land (agriculture) is often exposed to natural hazards, agents will be better off by investing in human capital as human capital is portable and less affected by natural hazards. Educated workers can find work in urban labor markets that can be distant from the affected areas. Porter (2008) recently showed that hurricane risks increase education and the effect is largest among the landless. Our study will also show empirical results in the similar line.

Similarly, investments in financial capital and livestock are also more robust to natural hazards than land. Under certain conditions, agents increase precautionary savings with increased risks (Deaton, 1991, Kimbal, 1990). Micro studies show that in the empirical setting where formal financial intermediation is not available, the accumulation of livestock buffers income shocks, helping smooth consumption (Rosenzweig and Wolpin, 1993).

However, the importance of ex-ante actions such as investing in certain assets highly depends on how agents perceive actual risks as well as their expectation of the likelihood of public assistance in the post-disaster period. The first question is also analogous to whether or not we can assume stationarity in risk structure and the agent’s rational expectations in the risks. These are empirical matters - it is challenging to identify dynamics of the risk structure and the agent’s learning behavior and information set (e.g., see Gine, Townsend and Vickery, 2007; Dercon and Christiaensen, 2007). In the analysis of this paper, we do not address the above issues but simply use the empirical frequency of natural hazards (flood and/or drought) from data under the assumption of rational expectations and risk structure stationarity. Similarly we assume that risk preference is homogeneous.<sup>5</sup> Other things being equal, the importance of ex-ante actions should increase with the frequency of natural hazards in the future.

To decide ex-ante actions, households potentially face a trade-off between income augmentation and income risk mitigation. For example, a large family may help diversify risks but also decrease per-child investments in schooling. However, investment in education seems to achieve the above two goals: increasing income and reducing risk. However, whether or not there are returns to schooling investment largely depends on the development of the non-agriculture labor market (including the possibility of migration).

> 5Wealthy households may be less risk averse than poor households. However, with imperfect credit market, wealthy households can self-insure against risks by utilizing their assets, and therefore take more risky choices than poor households.

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