Climate Hazards and Resilience in the Global Car Industry
Climate change will increase the frequency and severity of natural disasters. This paper examines the effects of such increases on the spatial organization of firms. Using data on the global car industry and an event-study design, I document that nearby floods significantly reduce assembly plant production, with partial reallocation to unaffected plants within the firm. I develop a novel, quantitative, multiregion model in which firms choose their plant locations and capacities to maximize expected profits amidst weather disruption risk. The model captures firms' incentives to diversify capacity across locations and hedge against potential local disruptions. I estimate the model for the automotive industry and use it to compute plant location and capacity choices under different probabilities of weather disruptions according to possible climate change scenarios. With heightened risks, firms build additional, smaller plants with larger spare capacities. This spatial reorganization entails productivity losses, resulting in higher consumer prices.
