Weathering the Storm: Supply Chains and Climate Risk
Joint work with Gaurav Khanna, Nicolas Morales and Nitya Pandalai-Nayar
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 identify firms exposed to climate risk through their supply chains. Using an event-study design we find firms with suppliers districts that flooded experienced a decline in inputs of 75\% that persisted 2 months. Affected firms returned to their original suppliers after the shock. We develop a general equilibrium model of firm input sourcing under climate risk. Firms diversify otherwise identical inputs from suppliers across space, trading off the probability of a climate shock against the cost of higher inputs. We quantify the model using data on 271 Indian districts. The model implies expected real wages vary across space and are correlated with geography, productivity and climate risk. The volatility of real wages is 84\% lower under sourcing with climate risk compared to autarky. While expected real wages are 11.6\% lower in autarky overall, for 5\% of districts expected real wages are higher under autarky as diversification for these districts comes with higher cost inputs. Diversification through supply chains unambiguously lowers the volatility of real wages, but can have positive or negative effects on their level.
