Temperature Effects on Productivity and Factor Reallocation: Evidence from a Half Million Chinese Manufacturing Plants

Posted: 24 Aug 2016

See all articles by Peng Zhang

Peng Zhang

Hong Kong Polytechnic University - School of Accounting and Finance

Junjie Zhang

Duke Kunshan University

Olivier Deschenes

University of California, Santa Barbara - College of Letters & Science - Department of Economics; National Bureau of Economic Research (NBER); IZA Institute of Labor Economics

Kyle Meng

University of California, Santa Barbara (UCSB) - Donald Bren School of Environmental Science & Management

Multiple version iconThere are 2 versions of this paper

Date Written: August 24, 2016

Abstract

Understanding the relationship between temperature and economic growth is critical to the design of optimal climate policies. A large body of literature has estimated a negative relationship between these factors using aggregated data. However, the micro-mechanism behind this relationship remains unknown; thus, its usefulness in shaping adaptation policies is limited. By applying detailed firm-level production data derived from nearly two million observations of the Chinese manufacturing sector in the period of 1998-2007, this paper documents the relationship between daily temperature and four components in a standard Cobb-Douglas production function: output, total factor productivity (TFP), labor, and capital inputs. We detect an inverted U-shaped relationship between daily temperature and TFP; by contrast, the effects of temperature on labor and capital inputs are limited. Moreover, the response function between daily temperature and output is almost identical to that between temperature and TFP, thereby suggesting that the reduction in TFP in response to high temperatures is the primary driver behind output losses. In addition, temperature affects both labor and capital productivity. A medium-run climate prediction indicates that climate change will reduce TFP by 4.18%, and result in output losses of 5.71%. This loss corresponds to CNY 208.32 billion (USD 32.57 billion) in 2013 values. Given that TFP is invariant to the intensity of use of labor and capital inputs and reflects both labor and capital productivity, the Chinese manufacturing industry is unlikely to avoid climate damages simply by implementing factor allocation. Thus, new innovations that expand the technology frontier for all inputs should be developed to offset weather-driven TFP losses if other adaptation strategies are infeasible.

Keywords: Climate Change, TFP, Manufacturing, China

JEL Classification: Q54, Q56, L60, O14, O44

Suggested Citation

Zhang, Peng and Zhang, Junjie and Deschenes, Olivier and Meng, Kyle, Temperature Effects on Productivity and Factor Reallocation: Evidence from a Half Million Chinese Manufacturing Plants (August 24, 2016). Available at SSRN: https://ssrn.com/abstract=2828523

Peng Zhang (Contact Author)

Hong Kong Polytechnic University - School of Accounting and Finance ( email )

Hung Hom
Kowloon
Hong Kong

HOME PAGE: http://pengzhang.weebly.com

Junjie Zhang

Duke Kunshan University ( email )

No. 8 Duke Avenue
Kunshan, 215316
China
+86 512 36657068 (Phone)

HOME PAGE: http://junjiezhang.org

Olivier Deschenes

University of California, Santa Barbara - College of Letters & Science - Department of Economics ( email )

UC Santa Barbara
Santa Barbara, CA 93106
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

IZA Institute of Labor Economics ( email )

P.O. Box 7240
Bonn, D-53072
Germany

Kyle Meng

University of California, Santa Barbara (UCSB) - Donald Bren School of Environmental Science & Management ( email )

4670 Physical Sciences North
Santa Barbara, CA 93106-5131
United States

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