Industrial Productivity in a Hotter World: The Aggregate Implications of Heterogeneous Firm Investment in Air Conditioning

30 Pages Posted: 27 Dec 2016

See all articles by Joshua Graff Zivin

Joshua Graff Zivin

University of California, San Diego (UCSD) - Graduate School of International Relations and Pacific Studies (IRPS); National Bureau of Economic Research (NBER)

Matthew E. Kahn

University of Southern California; National Bureau of Economic Research (NBER)

Date Written: December 2016

Abstract

How will a nation’s aggregate urban productivity be affected by climate change? The joint distribution of climate conditions and economic activity across a nation’s cities will together determine industrial average exposure to climate risk. Air conditioning (AC) can greatly reduce this heat exposure. We develop a simple model of air conditioning adoption by heterogeneous firms within an industry. Our analysis suggests that high productivity firms are more likely to adopt AC since they suffer larger productivity losses when it is hot. Given that the most productive firms produce a disproportionate share of industry-level output, we present aggregation results highlighting how the industry’s output is insulated from the heat. Our empirical analysis of the impacts of heat on total factor productivity in U.S manufacturing yields findings broadly consistent with our model’s predictions.

Suggested Citation

Graff Zivin, Joshua and Kahn, Matthew E., Industrial Productivity in a Hotter World: The Aggregate Implications of Heterogeneous Firm Investment in Air Conditioning (December 2016). NBER Working Paper No. w22962. Available at SSRN: https://ssrn.com/abstract=2890094

Joshua Graff Zivin (Contact Author)

University of California, San Diego (UCSD) - Graduate School of International Relations and Pacific Studies (IRPS) ( email )

9500 Gilman Drive
La Jolla, CA 92093-0519
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Matthew E. Kahn

University of Southern California ( email )

2250 Alcazar Street
Los Angeles, CA 90089
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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