Irrigation Investments and Agricultural Productivity: Unveiling the Mechanisms and Impacts under Climate Change

Leveraging exogenous government irrigation investments and longitudinal household survey data over 15 years, we investigate how irrigation affects agricultural productivity under climate change. We find that the irrigation investment increased the share of irrigated farmland by 11.0%, which, in turn, increased per-area output by 14.9%, net agricultural income by 15.6%, agricultural TFP by 13.7%, and per-labor output by 36.2%. These effects are driven by four key mechanisms: increased use of high-productivity inputs, expanded cultivation area, labor reallocation from farm work to off-farm work, and mitigation of drought damage. The induced land expansion and labor reallocation explain the much larger increase in per-labor output. A cost-benefit analysis suggests a high rate of return to irrigation investment, with about half of the return stemming from labor reallocation that increased off-farm income. This study highlights the policy relevance of irrigation investments in improving agricultural productivity and accelerating rural transformation under climate change.