This study investigates the impact of climate change adaptation on farm households’ downside risk exposure (e.g., risk of crop failure) in the Nile Basin of Ethiopia. The analysis relies on a moment-based specification of the stochastic production function.
We estimate a simultaneous equations model with endogenous switching to account for the heterogeneity in the decision to adapt or not, and for unobservable characteristics of farmers and their farm. We find that (i) climate change adaptation reduces downside risk exposure; farm households that implemented climate change adaptation strategies get benefits in terms of a decrease in the risk of crop failure; (ii) farm households that did not adapt would benefit the most in terms of reduction in downside risk exposure from adaptation; and (iii) there are significant differences in downside risk exposure between farm households that did and those that did not adapt to climate change. The analysis also shows that the quasi-option value, that is the value of waiting to gather more information, plays a significant role in farm households’ decision on whether to adapt to climate change. Farmers that are better informed may value less the option to wait to adapt, and so are more likely to adapt than other farmers.
