Expectations and Adaptation to Environmental Risks

Abstract

Climate change is expected to have large, negative effects on the global economy. Adaptation by individuals and firms will determine, in part, how much damage ultimately occurs. This paper introduces a method for estimating forward-looking adaptation based on changes in expectations about the weather, provides conditions under which public forecasts provide good measures for these expectations, and formalizes identification of ex ante adaptation using ex post observations. To apply the method, I build a novel dataset of El Nino/Southern Oscillation (ENSO) forecasts and estimate adaptation by North Pacific albacore harvesters to ENSO-driven climate variation. The results show that, in this setting, nearly all of the effect of climate variation can be controlled through adaptation. Detailed, firm-level data allows for exploration of mechanisms, showing that vessels primarily adapt by timing entry into the fishery.

Keywords: climate change, adaptation, forecasts, expectations

JEL Classification: Q54, D83, Q51