The Impact of Climate Change on Agriculture: Nonlinear Effects and Aggregation Bias in Ricardian Models of Farmland Values

Ricardian (hedonic) analyses of the impact of climate change on farmland values typically assume additively separable effects of temperature and precipitation with model estimation being implemented on data aggregated across counties or large regions. We use a large panel of farm-level data to investigate the potential bias induced by such approaches. Consistent with the literature on plant physiology, we observe significant nonlinear interaction effects, with more abundant precipitation acting as a mitigating factor for increased heat stress. This interaction disappears when the same data are aggregated in the conventional manner, leading to predictions of climate change impacts that are significantly distorted.