Extreme heat and markets: Theoretical and empirical evidence from Nigeria

We investigate how exposure to extreme temperature affects smallholder commercialization. We examine a range of outcomes that indicate the degree of commercialization, including market participation, sales quantity, commercialization index, and sales revenue, which serves as an indicator of monetary benefit. Recognizing the non-separability between production and commercialization, we also examine how extreme temperature directly affects agricultural production. To address these questions, we develop a simple and straightforward theoretical framework that links temperature events to production and market dynamics. From this framework, we derive a set of hypotheses which we proceed to test empirically. Our empirical strategy leverages a comprehensive three-wave panel dataset, which we integrate with earth observation data on temperature extremes. We find that extreme temperatures lead to production losses. We also observe significant declines in market participation among smallholder farmers which could be explained by production shortfalls. This reduction is evident at both the extensive margin (likelihood of participating in markets) and the intensive margin (sales quantity). Furthermore, we observe that when farmers face extreme temperatures, the proportion of harvested crops they sell and the resulting revenue from these also decrease. Causal mediation analysis further confirms that production losses due to extreme temperatures explains the reduction in market outcomes. Overall, these findings highlight the broader economic burden that extreme weather events continue to impose on smallholder households.