Heterogeneous Firms under Regional Temperature Shocks: Exit and Reallocation, with Evidence from Indonesia

Victoria Wenxin Xie

Economic Development and Cultural Change, 2024, vol. 72, issue 2, 659 - 690

Abstract: Are less productive firms in developing countries disproportionately affected by climate change? Using firm-level data from Indonesia, I find less productive firms are more likely to exit the surveys when temperature rises. Also, there is relative output redistribution to the initially more productive firms. The results are consistent with a heterogeneous firm model that has a skill-biased production function, where heat disproportionately affects unskilled labor productivity. Finally, surviving firms switched to use of more skilled labor and more imported inputs. These results illustrate how climate change affects firms of different initial productivity and how various margins of firm-level adjustment could mitigate such effects.

Date: 2024
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