Expectations and Adaptation to Environmental Risks

Climate change is projected to severely damage the global economy. Adaptation in response to a changing climate will affect how much damage ultimately occurs. This paper introduces a method for estimating forward-looking adaptation based on differences in responses to forecasts and realizations of weather. The method is applied to estimate climate damages and adaptation in a fishery. The application uses a novel dataset of climate forecasts and detailed, firm-level records. In this setting, most of the effect of climate variation can be controlled through adaptation. Important adaptation mechanisms involve reducing production costs and timing entry into the fishery