Examining the effect of climate vulnerabilities on the discounting behaviour of farmers

Abstract

In agriculture, the possibility of climatic hazards negatively impacting small farmers’ livelihood is high. Thus, there are reasons to contend that climate vulnerabilities could determine economic behaviour. This paper investigates whether discounting behaviour varies with exposure to natural hazards. We analyse data from a survey involving an experiment in which farmers made choices between a smaller immediate payment compared with larger future amounts. The results show that 58% heavily discounted the future in favour of the immediate payment. Among the climatic shocks examined, flood, drought and salinity were the main hazards farmers faced on their plots. However, these natural hazards varied across locations. Our examination of the effect of the experience of natural hazards and the severity of climate vulnerability on farmers’ discounting behaviour suggests that experience and vulnerability had different impacts on discounting behaviour. Recent exposure to drought and flood reduces patience. However, the opposite is the case for a recent experience of salinity. This paper shows that under circumstances of climate vulnerabilities, farmers may be willing to make decisions that result in immediate albeit lower rewards in place of potential higher rewards in the future. The implication is that experience and vulnerability to natural hazards might affect farmers’ decision‐making to the extent that it prevents them from a speedy economic recovery post‐disaster.