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Adaptation to natural disasters through the

agricultural land rental market: evidence from

Bangladesh

Shaikh Eskander and Edward Barbier

May 2016

Centre for Climate Change Economics and Policy

Working Paper No. 266

Grantham Research Institute on Climate Change and

the Environment

Working Paper No. 236

The Centre for Climate Change Economics and Policy (CCCEP) was established by the University of Leeds and the London School of Economics and Political Science in 2008 to advance public and private action on climate change through innovative, rigorous research. The Centre is funded by the UK Economic and Social Research Council. Its second phase started in 2013 and there are five integrated research themes:

1. Understanding green growth and climate-compatible development 2. Advancing climate finance and investment 3. Evaluating the performance of climate policies 4. Managing climate risks and uncertainties and strengthening climate services 5. Enabling rapid transitions in mitigation and adaptation

More information about the Centre for Climate Change Economics and Policy can be found at: http://www.cccep.ac.uk. The Grantham Research Institute on Climate Change and the Environment was established by the London School of Economics and Political Science in 2008 to bring together international expertise on economics, finance, geography, the environment, international development and political economy to create a world-leading centre for policy-relevant research and training. The Institute is funded by the Grantham Foundation for the Protection of the Environment and the Global Green Growth Institute. It has nine research programmes:

1. Adaptation and development 2. Carbon trading and finance 3. Ecosystems, resources and the natural environment 4. Energy, technology and trade 5. Future generations and social justice 6. Growth and the economy 7. International environmental negotiations 8. Modelling and decision making 9. Private sector adaptation, risk and insurance

More information about the Grantham Research Institute on Climate Change and the Environment can be found at: http://www.lse.ac.uk/grantham. Pathways to Resilience in Semi-arid Economies (PRISE) is a five-year, multi-country research project that generates new knowledge about how economic development in semi-arid regions can be made more equitable and resilient to climate change. More information about the PRISE project can be found at: www.prise.odi.org. This working paper is intended to stimulate discussion within the research community and among users of research, and its content may have been submitted for publication in academic journals. It has been reviewed by at least one internal referee before publication. The research for this paper was carried out as part of the PRISE project, under the Collaborative Adaptation Research Initiative in Africa and Asia (CARIAA), with financial support from the UK Governments Department for International Development (DfID) and the International Development Research Centre (IDRC), Canada. The views expressed in this paper are those of the authors and do not necessarily represent those of the host institutions and its funders, including DfID and IDRC or its Board of Governors.

1

ADAPTATION TO NATURAL DISASTERS THROUGH THE AGRICULTURAL

LAND RENTAL MARKET: EVIDENCE FROM BANGLADESH

Shaikh M.S.U. Eskander a,

, Edward B. Barbier b

a Grantham Research Institute on Climate Change and the Environment, London School of Economics,

Houghton Street, London WC2A 2AE, UK.

b Department of Economics and Finance, University of Wyoming, 1000 E. University Ave, Laramie, WY

82071, USA

We thank, without implicating, Dilruba Akter, Giles Atkinson, Mintewab Bezabih, Declan Conway, Florence

Crick, Simon Dietz, Sam Fankhauser, Teevrat Garg, Ben Gilbert, Thorsten Janus, Khawaja Mamun, Judith

Reese, three anonymous referees and seminar participants at London School of economics for comments and

discussions. This work was carried out under the Collaborative Adaptation Research Initiative in Africa and

Asia (CARIAA), with financial support from the UK Governments Department for International Development

(DfID) and the International Development Research Centre (IDRC), Canada. The views expressed in this work

are those of the creators and do not necessarily represent those of DfID and IDRC or its Board of Governors.

Eskander also acknowledges the financial support of the Grantham Foundation for the Protection of the

Environment, and the ESRC Centre for Climate Change Economics and Policy.

Corresponding author. Tel: +44(0)78 5600 3276.

E-mail addresses: S.M.Eskander@lse.ac.uk (Shaikh M.S.U. Eskander), ebarbier@uwyo.edu (Edward B.

Barbier).

mailto:S.M.Eskander@lse.ac.ukmailto:ebarbier@uwyo.edu

2

ADAPTATION TO NATURAL DISASTERS THROUGH THE AGRICULTURAL

LAND RENTAL MARKET: EVIDENCE FROM BANGLADESH

We examine the effects of natural disaster exposure on agricultural households

who simultaneously make rent-in and rent-out decisions in the land rental

market. Our econometric approach accounts for the effects of disaster exposure

both on the adjustments in the quantity of operated land (i.e. extensive margin)

and agricultural yield conditional on the land quantity adjustments (i.e.

intensive margin), based on selectivity-corrected samples of rental market

participants. Employing a household survey dataset from Bangladesh, we find

that farmers were able to ameliorate their losses from exposure to disasters by

optimizing their operational farm size through participation in the land rental

market. These results are robust to alternative specifications. This suggests that

the land rental market may be an effective instrument reducing disaster risk, and

post-disaster policies should take into account this role more systematically.

(JEL Q24, Q54, D13, D64, Q15).

Keywords: Bangladesh; Natural Disasters; Extensive and Intensive Margins;

Land Rental Market.

I. INTRODUCTION

Agricultural households from low-income countries, where widespread poverty among rural

households often limits their ability to invest in defensive measures especially when markets

are incomplete or non-existent, are highly susceptible to exposure to climate-induced natural

disasters such as floods and cyclones. Consequently, natural disasters often force rural

households and farmers to adopt coping strategies such as cutting back on consumption of

basic food and nutrients and selling of productive assets such as agricultural land (Duflo

2003; Jensen 2000).1 Apart from selling agricultural land, the immediate response of many

rural households is to seek off-farm work in either agricultural or non-agricultural

employment (Banerjee 2007; Mueller and Quisumbing 2011). However, farmers might also

have another coping mechanism, which is to adjust their operational farm size through

participation in the land rental market (Banerjee 2010b; Ward and Shively 2011). Through

1 For example, selling of arable land is among the coping strategies adopted by Bangladeshi farmers in response

to disaster exposure (BBS 2010).

3

participation in the land rental market, some farmers facing exposure to disaster risks might

choose to rent-in agricultural land, whereas others might rent-out land. These land rental

transactions enable farmers to adjust their operational farm size, and thus indirectly,

agricultural yield. To date, this potential mechanism of farmers using the land rental market

as a source of indirect adaptation to natural disaster exposure has not yet been addressed in

literature. Here, we investigate this potential role of the land rental market in ameliorating the

agricultural yield effects of disaster exposure through a case study of Bangladesh.

Bangladesh is predominantly an agricultural country that experiences recurring damaging

disaster events, such as floods and cyclones. During 2006-11, Bangladesh experienced

aggregate losses of US$ 114 million from 11 floods and US$ 2,570 million from 15 cyclones

(EM-DAT 2016). Most of these losses occur to agriculture, which employs around 44 percent

of the labor force and accounts for 20 percent of gross domestic product (BBS 2010).

Moreover, low average farm size and high incidence of rural poverty in Bangladesh

necessitate the optimal management and utilization of the available land especially in

response to a disaster.

We examine agricultural adaptation to natural disaster exposure via the land rental market

using an econometric model of a farmer's rent-in and rent-out choices. For this purpose, we

adapt the standard empirical model that accounts for both extensive margin, i.e. adjustments

in the quantity of operated land, and intensive margin, i.e. agricultural yield conditional on

the land quantity adjustment (e.g., Lee 1990; Moore, Gollehon, and Carey 1994; Pfeiffer and

Lin 2012 and 2014). The extensive margin is estimated in a simultaneous equations model, in

which the amounts of rent-in and rent-out land chosen by each farmer are censored by sample

selection. The next stage employs the selectivity-corrected sample to es