The Impact of Risk-Sharing Mechanisms on Smallholder Farmer Climate Adaptation Strategies

Climate change poses increasing risks to the smallholder farmers’ livelihoods, with consequences for several policy issues. One such issue, human migration, has long been a strategy for farming households to diversify income sources and manage livelihood risks. However, the interaction of migration with other possible adaptation strategies under future climate and policy scenarios is still poorly understood. This study seeks to better understand these interactions, with a particular focus on the following questions: (1) What adaptation outcomes are likely under different climate scenarios? (2) How does the social network of a farming household impact its decision-making? (3) What risk-sharing mechanisms (both formal and informal) can help promote more resilient livelihood strategy choices? To address these questions, we develop a stylized agent-based model (ABM) consisting of smallholder farmer households with heterogeneous risk preferences, wealth, and social capital. The ABM models the impact of interactions between households on the adoption of different adaptation strategies, e.g. rural-urban migration and crop diversification, as climate stress increasingly threatens subsistence farming livelihoods via higher temperatures and extreme drought. We track the effects of different sources of complexity, including bounded rationality, population structure by educational attainment, and shortand long-term climate effects, on households’ decision-making. Finally, we explore the effects of informal (sharing of remittances) and formal (index-based insurance) risk-sharing mechanisms on farmer adaptation decisions. The model is calibrated using climate and socioeconomic data from South Asian subsistence farming regions. We find that without climate effects, approximately 55 percent of households engage in migration over a 30-year timeframe. Migration increases community income through remittances and helps to finance a transition to cash crops for approximately 50 percent of households. However, only 40 and 25 percent of households engage in migration and crop diversification, respectively, when we include climate effects. As climate increasingly impacts farming-based livelihoods, fewer households have the financial ability to afford migration and diversification strategies. This restricts information exchange between households about alternative strategies, which further traps households in subsistence farming. Consistent with theories regarding differential vulnerability to climate change, it is the poorest and least-educated households whose decisions are most restricted by these impacts. We find that informal risk management mechanisms have a significant effect on households’ strategy decisions. For example, allowing for moderate remittance sharing within household networks substantially increases the proportion of households who engage in migration. By contrast, the introduction of index-based insurance does not by itself substantially alter households’ livelihood decisions; transitioning to cash crops is still seen as too risky of an investment by most households. However, when combined with high access to accurate climate and livelihood information, both formal and informal risk management mechanisms may significantly expand adoption of alternative livelihood strategies. This highlights the opportunity for a complementary set of policies that both increase access to information and facilitate risk-sharing mechanisms in order to build long-term farmer resilience to future climate impacts.