Quantifying the costs of drought : new evidence from life satisfaction data

We estimate the cost of droughts by matching rainfall data with individual life satisfaction. Our context is Australia over the period 2001 to 2004, which included a particularly severe drought. Using fixed-effect models, we find that a drought in spring has a detrimental effect on life satisfaction equivalent to an annual reduction in income of A$18,000. This effect, however, is only found for individuals living in rural areas. Using our estimates, we calculate that the predicted doubling of the frequency of spring droughts will lead to the equivalent loss in life satisfaction of just over 1% of GDP annually.