Endogenous farm-type selection, endogenous irrigation, and spatial effects in Ricardian models of climate change

Thomas Chatzopoulos and Christian Lippert

European Review of Agricultural Economics, 2016, vol. 43, issue 2, 217-235

Abstract: In the estimation of Ricardian models the endogeneity of adaptation measures is typically ignored. In this article we propose a new estimation strategy that explicitly recognises the endogeneity of the farm type and irrigation to climate. Based on the latest census data on over 270,000 farms in Germany, we estimate a cross-sectional, spatial-IV model that decomposes the effects of climate on farm profitability into direct (unmediated) and indirect (mediated by the variables that reflect adaptation). Our results show that neglecting the endogenous nature of adaptation measures may substantially bias the magnitude of the total effect of climate on farm profitability.

Date: 2016
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