The Impact of Risk Transfer Mechanisms on Smallholder Farmer Climate Adaptation

Increasing climate stress is likely to significantly impact the livelihoods of the world's 500 million smallholder farming households, leading to potentially divergent adaptation outcomes. While several econometric studies have identified significant relationships between temperature, crop yields, and rural-urban migration, the effects of potential interventions to help smallholder farmers manage climate risks are still poorly understood.

In this project, we develop an agent-based model (ABM) to explore how livelihood strategies evolve within a small agricultural community as climate change increasingly threatens crop yields and leads to more frequent extreme droughts. Agents constitute individual households that decide among a portfolio of strategies (including: farming subsistence crops, diversifying to cash crops, and/or engaging in rural-urban migration) based on their perceived income and financial risk. The model is calibrated using household survey , and growing season drought index data from Nepal's Chitwan Valley. We use the ABM to assess how different policy interventions - including cash transfers, index-based crop insurance, and a bank that smooths variability in migration remittances - impact the deployment of these strategies.

We construct a base case with no policies and a mean temperature increase of 1.5^oC by 2050 (one of the reference scenarios used in Nepal's National Adaptation Plan). In this case, approximately 55 percent of households engage in migration, and 33 percent of households invest in cash crops, producing an average community income of 430 USD/household/cropping cycle. A small cash transfer (30 USD/hh/cycle) facilitates increases in both migration and cash crop farming by alleviating financial constraints for poorer households, significantly increasing average income to 625 USD/hh/cycle. By contrast, index insurance and a remittance bank actually decrease average community income (to 330 and 370 USD/hh/cycle, respectively), as the income-smoothing benefits of these policies keep many households from adopting higher-risk, higher-reward strategies. However, relative impacts of these policies vary with different scenarios of temperature change and community risk preferences, indicating there is no optimal "one-size-fits-all" intervention.