Climate change and extreme weather events are a global problem, but especially affect poor countries, including firms in these countries. We know that weather shocks affect these firms through both a demand and supply channel. Depending on which channel dominates, short-run firm adjustments to the shocks differ, and understanding these adjustments can help in designing better policy to reduce the impact of climate change on poor countries. I combine firm-level World Bank data with high-resolution weather data to show that weather shocks are primarily supply shocks, affecting non-agricultural firms across sub-Saharan Africa and South Asia by reducing their productivity. I further show that firms react to these shocks by scaling back their expenditures on productive capability, hiring less machinery, less space and fewer non-production workers. These adjustments further reduce firm productivity. I develop a simple international trade model featuring hired productive capability that rationalizes my reduced form findings. Combining the model with machine learning estimates of the impact of climate change, I highlight the importance of productivity adjustments for policy design: Productivity responses make trade cost reductions 1.7 times more effective at countering welfare losses from climate change.


This talk is presented by the Economic Development Seminar, sponsored in part by the Department of Economics through a generous gift given by Jay and Beth Rakow.