Input subsidies, fertilizer intensity and imbalances amidst climate change: Evidence from Bangladesh

Abstract

This study investigates whether input subsidies to rural households with exposure to droughts affect fertilizer application rates. The study uses a comprehensive panel dataset of rice plots from the Bangladesh Integrated Household Survey. The study uses a heteroskedasticity-based instrumental variable approach (Lewbel estimator) to account for the potential endogeneity of input subsidies on input usage. Findings show that while input subsidies are generally associated with increased fertilizer application, the effect is attenuated by household vulnerability to climate shocks. Input subsidies widen the gap between recommended and actual fertilizer usage for urea but narrow it down to diammonium phosphate and muriate of potassium. However, the aggregate effect on balanced fertilizer application is a higher degree of imbalance when households are exposed to climate shocks. The analysis highlights the heterogeneous effect of subsidies on fertilizer use across different farm sizes, seed varieties, and soil quality. The heterogeneities underscore the need for targeted subsidy programs and complementary policies to promote balanced fertilizer application while addressing climate change adaptation strategies.