Weather Fluctuations, Expectation Formation, and Short-Run Behavioral Responses to Climate Change
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Weather Fluctuations, Expectation Formation, and Short‑Run Behavioral Responses to Climate Change Xinde Ji1 · Kelly M. Cobourn2 Accepted: 5 November 2020 © Springer Nature B.V. 2020
Abstract One premise adopted in most previous studies is that weather fluctuations affect economic outcomes contemporaneously. Yet under certain circumstances, the impact of weather fluctuations in the current year can be carried over into the future. Using agricultural production as an example, we empirically investigate how past weather fluctuations affect economic decision-making by shifting agents’ subjective expectations over future climate. We find that agricultural producers do not form expectations on future climate using only longrun normals, and instead engage in a combination of heuristics, including the availability heuristic and the reinforcement strategy. Adopting these learning mechanisms causes farmers to significantly over-react to more recent fluctuations in weather and water availability when making ex ante acreage and crop allocation decisions. Keywords Weather fluctuation · Climate change adaptation · Expectation formation · Agricultural production JEL Classification Q54 · Q15 · Q25 There has been widespread interest in the economic literature on understanding the impacts of climate change on economic outcomes and corresponding adaptation measures. A popular approach to do so is to use random weather fluctuations to identify the effects of climate change on economic outcomes, such as agricultural production (Deschênes and Greenstone 2007; Schlenker and Roberts 2009), gross domestic product (Dell et al. 2012), and longrun adaptation (Deschênes and Greenstone 2011). One premise adopted in most studies is that weather fluctuations affect economic outcomes contemporaneously. For example, extreme heat events decrease crop yields (e.g. Schlenker and Roberts 2009; Lobell et al. 2013), but this negative effect applies only to the particular year in which the extreme heat event occurs. However, under certain circumstances, the impact of weather fluctuations * Xinde Ji [email protected] Kelly M. Cobourn [email protected] 1
Brandeis University, 415 South St MS 021, Waltham, MA 02453, USA
2
Virginia Tech, 310 West Campus Dr, Blacksburg, VA 24061, USA
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in the current year can be carried over into the future. Studies have shown that extreme weather realizations can affect long-term individual economic well-being (Ebenstein et al. 2016; Deryugina et al. 2018), future macroeconomic output (Dell et al. 2012), and induce and intensify political instability, human conflicts, and wars in the future (Zhang et al. 2008; Hsiang et al. 2013; Zheng et al. 2014; Iyigun et al. 2017). One particular pathway through which past weather fluctuations can affect future economic outcomes is the process of expectation formation. Not only do weather fluctuations affect contemporaneous outcomes, they also shape what people expect in terms of future climate. Both economists and psychologists have
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