Eliminating uncertainty in market access: The impact of new bridges in Rural Nicaragua

EGC Research Summary, November 2020

Many residents of flood-prone areas of rural Nicaragua face uncertain economic futures each season. In a new paper, EGC faculty affiliate Kevin Donovan and co-author Wyatt Brooks of Arizona State University examine the role of footbridges in providing rural households reliable access to larger and higher-paying urban labor markets. They find that bridge construction increases integration, leading to substantial positive economic impact on rural economies.

The paper underscores the increased benefits of rural integration in the context where income is derived both from farming and labor markets – a common feature of households in developing countries. Moreover, it analyzes the spillover effects of improved access to the labor market on the agricultural economy and shows that bridges might have a compounding positive impact: not only does labor income rise, but agricultural investment increases along with increased profits.  

Eliminating Uncertainty in Market Access: The Impact of New Bridges in Rural Nicaragua

Wyatt Brooks & Kevin Donovan, Econometrica, Volume 88, Issue 5, September 2020.

Results at a Glance 

  • Flash floods lead to an unpredictable loss of access to urban markets for people residing in these villages. New bridges connecting rural villages in Nicaragua to outside labor markets eliminate the risk associated with seasonal flash floods.
  • The presence of a bridge eliminates the loss of income experienced during periods of floods and also increases labor income in non-flood periods by influencing labor market choices.
  • Farm profits grow in villages with increased integration, as resources previously saved are free for agricultural investment in fertilizers. Consistent labor market earnings in the face of fewer unpredictable negative income shocks make it possible to save less and invest more. 
  • The researchers’ model shows that consumption-equivalent welfare increases by 11% through both increasing mean consumption and decreasing unpredictability caused by floods.

In Nicaragua, both policymakers and residents cite flooding and the resulting isolation of villages as a critical development constraint. During periods of flooding, villagers are cut off from access to outside markets as crossing the river carries a risk of injury or death. Since most rural households are active in the labor market, inaccessible outside labor markets during floods limit choices available and incomes earned.  

The researchers worked with an NGO to identify 15 villages in similar need of a bridge. Out of this group, bridges were built in six villages based on the feasibility criteria comprising the characteristics of the riverbed – a feature uncorrelated with any relevant village characteristics. In this quasi-experimental setting, the researchers could compare outcomes between these two sets of villages (i.e., those with and those without a bridge) using causal inference.

The researchers collected data from both annual surveys with all households in each of the 15 villages and biweekly surveys with a subset of households to understand the contemporaneous impact of flooding on household outcomes. 

A bridge eliminates the loss of income during floods 

In the absence of a bridge, a flood depresses weekly labor market earnings by 18 percent, and increases the probability of reporting no income from 25 percent to 32 percent compared to a week without a flood. When a bridge was constructed, both of these effects disappeared. Hence, the bridge offsets the negative impact of floods on labor income. 

Certain access to outside labor markets increases labor income in non-flood periods by expanding choices

The presence of a bridge also increases labor income for households in non-flood periods by influencing choices. Men shift their time from relatively lower-paying jobs in the village to higher-paying jobs outside the village, while women increase their participation in the labor force by 65 percent. Moreover, those who stay in the village for work benefit from the general equilibrium increase: their daily wages rise as village labor supply declines.

Agricultural productivity and profits rise as farmers redirect resources toward investment

In villages with a bridge, farmers spend nearly 60 percent more on fertilizers, and farm profits increase by 75 percent. Protected from unpredictable fluctuations in income induced by floods, villagers are free to spend a larger part of their precautionary savings on productive farm activities.

Agricultural storage declines from 90 to 80 percent of the harvest, suggesting that farmers sell a greater share of their harvest and use the proceeds to invest more in their farms. These results imply that a lack of access to the outside market may have a substantial impact on long-term agricultural decisions in rural economies.

With a bridge, the increase in welfare is larger than the increase in income due to the ability to mitigate risk

According to a model produced by the authors, the introduction of the bridge increases consumption-equivalent welfare by 11 percent. This increase in welfare comes both from an increase in consumption and the decrease in the volatility of consumption. This underscores the importance of reduction in risk that comes with the presence of a bridge. 

Bridges are highly cost-effective

The authors find that bridges have an internal rate of return of nearly 20%, since each bridge costs about $40,000 (or C$1,100,000), generates an annual benefit of $7800 (or C$217,000) and lasts at least 40 years. Spillover effects are critical to this calculation. A full third of this internal rate of return is due to the increase in farm profit alone. Given that other benefits are not measured comprehensively, this is likely a conservative estimate of the actual returns. 

Infographic by Annie Yan. Research summary by Sanjam Chhabra.