Extreme weather impact and urban–rural income gap: a study on the mitigation effect of agricultural insurance

Abstract

Climate change-induced extreme weather events are increasingly recognised as a structural driver of widening economic inequality between urban and rural populations. This study investigates the causal relationship between extreme weather shocks, agricultural insurance penetration, and the urban–rural income gap using a panel dataset of 30 provincial-level administrative units across two emerging economies over 2000–2023. A Two-Way Fixed Effects (TWFE) regression framework, complemented by Instrumental Variable (IV) two-stage least-squares estimation and Difference-in-Differences (DID) identification, is employed. Results show that a one-standard-deviation increase in extreme weather frequency elevates the urban–rural income gap ratio by 0.471 points (p < 0.001). Agricultural insurance penetration exerts a significant moderating effect: each 10-percentage-point increase in coverage mitigates approximately 28.3% of the weather-induced income gap widening. Mediation analysis reveals that primary transmission channels include agricultural output loss (standardised path coefficient = 0.41), farm household income reduction (0.38), and induced rural-to-urban labour migration (0.22). Heterogeneity analysis across provincial income terciles confirms that the insurance mitigation effect is most pronounced among low-income rural provinces (β = −0.38), indicating a progressive risk-pooling function of agricultural insurance. Findings are robust across Propensity Score Matching (PSM), event study analyses, and alternative extreme weather operationalisations. Results provide empirically grounded policy guidance for subsidised agricultural insurance programmes as targeted inequality reduction instruments under accelerating climate change.