by Rajat Kochhar, Ruozi Song, Jeffrey E. Sun
What role do government policies which distort market competition play in impeding farmers’ climate change adaptation? We study this question in the context of India, where longer-run adaptation to climate change has been inadequate — posing a considerable risk to its ∼250 million agricultural workers. We exploit spatial discontinuities in intermediary market power, created by state-level laws that restrict farmer intermediary transactions to the same state, to determine how spatial competition affects farmers’ adaptation. We find that a farmer selling in the 75th percentile of the competition index compared to one that faces the 25th percentile of the competition index achieves a 4.9 percent higher output for each additional day of extreme heat. This effect is driven by increased input usage by farmers in anticipation of higher prices after climate shocks, an effect limited only to high competition areas. We then propose and estimate a quantitative spatial trade model with intermediary market power to examine the welfare implications of higher competition for adaptation. Our structural estimates suggest that the farmer’s economic loss due to extreme weather (i.e. their climate damage function) could be mitigated by 13.8 percent if government regulation distorting market competition is dismantled. These results highlight the importance of understanding the political economy of reforming these competition-distorting laws to accelerate climate change adaptation.