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Household Time and Risk Preferences and Adaptation to Climate Change

Climate change adaptation is fundamentally a decision to incur certain costs now in return for uncertain benefits and costs in the future. Thus time and risk preferences will shape how individuals and groups adapt on their own and in response to public policies and programs. Drawing on recent advances in behavioral economics, we clarify how these adaptation decisions are shaped by different parameters and forms of time and risk preferences. The magnitude of these parameters and the prevalence of these forms thus become important empirical questions for policymakers. Past studies, however, shed little light on these questions because their empirical designs and estimation strategies are often unable to discriminate among rival explanations for the patterns observed. Applying recent developments in experimental designs and estimators, we conduct field experiments to characterize time and risk preferences in a rural population in the western, arid region of Costa Rica, targeted by policymakers for climate change adaptation investments. Decisions about these investments are often made at the household-level, rather than at the individual-level. Thus, we expand on previous experimental studies by characterizing time and risk preferences at both the levels of individuals and married couples. We conclude by exploring whether the hypotheses about how adaptation investments vary with time and risk preferences are validated by the data, and by describing how climate change adaptation policies should be designed if the patterns observed in study site are prevalent in other low and middle-income nations. ∗Corresponding Author. Department of Economics, University of Maryland Baltimore County. Email: mbernedo@umbc.edu. †Tropical Agricultural Research and Higher Education Center (CATIE) and Department of Economics, University of Gothenburg. Email: falpizar@catie.ac.cr. ‡Carey Business School and Whiting School of Engineering, Johns Hopkins University. Email: pferraro@jhu.edu