Adaptation to climate risk: Evidence from cyclones and flooding in Bangladesh

This paper evaluates the importance of adaptation in dealing with an increase in climate risk. The paper studies adaptation along two margins: changes in crop choices, and reallocation of workers across sectors. Using long-term data on cyclones and flooding in Bangladesh, I find that the increase in propensity of both cyclones and floods affect crop choice, but only cyclones affect sectoral employment, shifting employment out of agriculture. The paper develops a structural model to study the welfare implications of adaptation and calculate the Value of adaptation i.e. how much worse welfare would be if both adaptation channels were shut off. I find that the Value of adaptation is informed by the nature of the shocks: both the intensity of future shocks and their correlatedness across crops and regions influence the Value of adaptation. The Value of adaptation is 20% in the case in which intensity of both flooding and cyclones doubles relative to the 2000s average, and such increases are correlated within regions.