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Positive Rainfall Shocks, Overoptimism, and Agricultural Inefficiency in China

/ 2023-09-18
Authorkaixing HuangJingyuan Guo, and Da Zhao 
Paper journal:Journal of the Association of Environmental and Resource Economists(JAERE)

This study identifies overopimism of farmers as an important catse of factormisallocation and inefficiency in agriculture. Annual deviation of rainfall fromthe local normal is exogenous, unanticipated, and transitory, but we find thatfarmers substantially adjust labor and land allocation in response to a laggedpositive rainfall shock. By examining the response of more than 10,000 farmersin China over 1l years, we show that a lagged positive rainfall shock significantlyreallocates labor from high-income off-farm work to low-income farm work, real-locates farmland from high-productivity farmers to low-productivity farmers, andreduces the average rural income by 8.1 percent. We also found that these effectsare primarily driven by the irrational responses of low-productivity farmers andthat farms with good irrigation conditions are generally not damaged.