Weathering the Storm: Supply Chains and Climate Risk

Juanma Castro-Vincenzi, Gaurav Khanna, Nicolas Morales and Nitya Pandalai-Nayar

No 24-03, Working Paper from Federal Reserve Bank of Richmond

Abstract: We characterize how firms structure supply chains under climate risk. Using new data on the universe of firm-to-firm transactions from an Indian state, we show that firms diversify sourcing locations, and suppliers exposed to climate risk charge lower prices. Our event-study analysis finds that firms with suppliers in flood-affected districts experience a decline in inputs lasting two months, followed by a return to original suppliers. We develop a general equilibrium model of firm input sourcing under climate risk. Firms diversify identical inputs from suppliers across space, trading off the probability of a climate shock against higher input costs. We quantify the model using data on 271 Indian districts, showing real wages vary across space and are correlated with geography and productivity. Wages are inversely correlated with sourcing risk, giving rise to a cost minimization-resilience tradeoff. Supply chain diversification unambiguously reduces real wage volatility, but ambiguously affects their levels, as diversification may come with higher input costs. While diversification helps mitigate climate risk, it exacerbates the distributional effects of climate change by reducing wages in regions prone to more frequent shocks.

Keywords: Production networks; supply chains; firm dynamics; climate change (search for similar items in EconPapers)
JEL-codes: F14 L14 (search for similar items in EconPapers)
Date: 2024-04
New Economics Papers: this item is included in nep-env
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Citations: View citations in EconPapers (2)

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Working Paper: Weathering the Storm: Supply Chains and Climate Risk (2024)
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DOI: 10.21144/wp24-03

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