Are Remittances a Source of Finance for Private Adaptation Strategy? Evidence from a Natural Experiment in the Cyclone Sidr Hit Regions of Southern Bangladesh

Abstract

We model household responses to storm protection actions in an endogenous risk framework and then test the predictions based on a recently concluded survey from southern Bangladesh hit by the category-5 Cyclone-Sidr in 2007. Households decide on the margin how to finance private adaptive expenditures and foreign remittances come into play a pivotal role in shaping private adaptive behaviour. For our empirical analysis, we use IV method to harness a random assignment of treatment of remittances by exploiting a natural shock wherein some households suffered damages from another second Cyclone-Roanu in the same area just prior to the survey period in 2016. Using natural experiment as an identification strategy, we find that for every 1,000 Taka increase in remittances receipts, private adaptive expenditures increase by 20.95 Taka. The IV results are generalizable because the control and treatment groups do not differ in their pretreatment observable characteristics.