Irrigation is widely recognized as a key driver of agricultural productivity and rural economic development, yet credible evidence on its impacts, mechanisms, and long-term economic returns remains limited due to endogenous irrigation investments. Leveraging the timing of government irrigation investments and longitudinal household survey data spanning 15 years, we investigate how irrigation affects agricultural productivity. We find that irrigation investment increased the share of irrigated farmland by 11.0 percentage points, which in turn raised per-area output by 14.9%, net agricultural income by 15.6%, agricultural total factor productivity 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 substantially larger increase in per-labor output. A cost-effectiveness analysis suggests a high return to irrigation investment, with approximately half of the return stemming from labor reallocation that increased off-farm income. These results provide strong evidence that irrigation investment plays an important role in improving agricultural productivity and accelerating rural transformation, with benefits extending beyond the farm by influencing labor markets.
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