Weathering the Storm: Supply Chains and Climate Risk

60 Pages Posted: 3 Apr 2024

See all articles by Juanma Castro-Vincenzi

Juanma Castro-Vincenzi

Harvard University - Department of Economics

Gaurav Khanna

University of California, San Diego (UCSD)

Nicolas Morales

Federal Reserve Banks - Federal Reserve Bank of Richmond

Nitya Pandalai-Nayar

University of Texas at Austin - Department of Economics

Multiple version iconThere are 2 versions of this paper

Date Written: April, 2024

Abstract

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 show that firms diversify sourcing locations, and suppliers exposed to climate risk charge lower prices. Our event-study analysis finds that firms with suppliers in flood-affected districts experience a decline in inputs lasting two months, followed by a return to original suppliers. We develop a general equilibrium model of firm input sourcing under climate risk. Firms diversify identical inputs from suppliers across space, trading off the probability of a climate shock against higher input costs. We quantify the model using data on 271 Indian districts, showing real wages vary across space and are correlated with geography and productivity. Wages are inversely correlated with sourcing risk, giving rise to a cost minimization-resilience tradeoff. Supply chain diversification unambiguously reduces real wage volatility, but ambiguously affects their levels, as diversification may come with higher input costs. While diversification helps mitigate climate risk, it exacerbates the distributional effects of climate change by reducing wages in regions prone to more frequent shocks.

Keywords: Production networks, supply chains, firm dynamics, climate change

JEL Classification: F14, L14

Suggested Citation

Castro-Vincenzi, Juanma and Khanna, Gaurav and Morales, Nicolas and Pandalai-Nayar, Nitya, Weathering the Storm: Supply Chains and Climate Risk (April, 2024). FRB Richmond Working Paper No. 24-3, Available at SSRN: https://ssrn.com/abstract=4782342 or http://dx.doi.org/10.21144/wp24-03

Juanma Castro-Vincenzi (Contact Author)

Harvard University - Department of Economics ( email )

Littauer Center
Cambridge, MA 02138
United States

Gaurav Khanna

University of California, San Diego (UCSD) ( email )

9500 Gilman Drive
Mail Code 0502
La Jolla, CA 92093-0112
United States

HOME PAGE: http://www.econgaurav.com

Nicolas Morales

Federal Reserve Banks - Federal Reserve Bank of Richmond ( email )

P.O. Box 27622
Richmond, VA 23261
United States

Nitya Pandalai-Nayar

University of Texas at Austin - Department of Economics ( email )

Austin, TX 78712
United States

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