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
Are remittances received by coastal households a source of finance for private adaptive strategies? We model household responses to storm events in an endogenous risk framework and then test the predictions from a recent survey undertaken in southern Bangladesh hit by the category-5 Cyclone-Sidr in 2007.
Households decide on the margin how to finance private adaptive expenditures and theoretically, remittances lead to higher private defensive expenditures if expected marginal benefits is lower than expected marginal costs of private actions. 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 estimate a remittances equation in the first stage employing as instrument the distance to nearest vehicular road interacted with an indicator variable for whether the remittances recipient households’ homes suffered damage by Cyclone-Roanu (the treatment group) controlling for a host of other variables including village fixed effects. We regress the variable, private adaptive expenditures undertaken for home improvements after Cyclone Sidr, in the second stage where the coefficient on remittances measures the “average treatment effect” for the treatment group. We find, 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.