Estimating Returns to Capital and Ability: Evidence from a Natural Experiment

In this paper, I investigate the respective economic returns to capital and inherent ability by studying the recovery of fishermen in Aceh, Indonesia, from the 2004 Indian Ocean Tsunami. Since the natural disaster wiped out almost all existing differentials in productive physical capital among fishermen, the subsequent random assignment of aid boats generates a natural experiment. Using panel data from fishing households, I first examine whether the transfer of physical capital increases overall productivity. Second, I investigate whether fishermen who were relatively more productive pre-tsunami retain their productive edge ex-post. Focusing on the sample of fishermen who lost their pre-tsunami boats, I find that the impact of aid boat length on fishing revenue is positive but diminishes over time. In contrast, I find that the impact of pre-tsunami productivity on fishing revenue increases. These results suggest that (i) returns to inherent ability, measured by pre-tsunami productivity, are more important than returns to physical capital in the long run, and (ii) the redistributive effects of boat aid on productivity are small and temporary.