Extreme high temperatures, firm dynamics and heterogeneity, and aggregate productivity: The case of Chinese manufacturing
Xiangyu Shi and
Xin Zhang
International Journal of Industrial Organization, 2025, vol. 101, issue C
Abstract:
We investigate how extreme (high) temperatures impact firm dynamics—specifically entry, exit, and aggregate productivity—in China's manufacturing sectors. While existing studies primarily focus on the effects of extreme temperatures on incumbent firms (intensive margin), we examine their influence on firm entry and exit (extensive margin) and the resulting implications for aggregate productivity. Extreme temperatures reduce the productivity of incumbent firms (productivity effects) but also select for higher-productivity firms to survive (selection effects). Leveraging a unique dataset containing registration information for the universe of firms, we document a novel general equilibrium mechanism: resources released by the exit of low-productivity firms are reallocated to higher-productivity firms. As a result, the combined effects on aggregate productivity are muted, challenging the prevailing consensus that extreme temperatures universally worsen productivity and economic outcomes. Using a heterogeneous firm framework à la Melitz (2003), we quantify these effects, providing valuable insights into the role of firm dynamics in shaping effective climate policies.
Keywords: Extreme (high) temperatures; Firm dynamics; Productivity effect; Selection effect; Aggregate productivity (search for similar items in EconPapers)
JEL-codes: C15 D21 D22 E23 Q56 (search for similar items in EconPapers)
Date: 2025
References: Add references at CitEc
Citations:
Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0167718725000426
Full text for ScienceDirect subscribers only
Related works:
Working Paper: Extreme High Temperatures, Firm Dynamics and Heterogeneity, and Aggregate Productivity: The Case of Chinese Manufacturing (2024) 
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
HTML/Text
Persistent link: https://EconPapers.repec.org/RePEc:eee:indorg:v:101:y:2025:i:c:s0167718725000426
DOI: 10.1016/j.ijindorg.2025.103176
Access Statistics for this article
International Journal of Industrial Organization is currently edited by P. Bajari, B. Caillaud and N. Gandal
More articles in International Journal of Industrial Organization from Elsevier
Bibliographic data for series maintained by Catherine Liu ().