Firm adaptation in production networks: evidence from extreme weather events in Pakistan

Abstract

This paper considers how far private adaptation may reduce future vulnerability to climate risks. Using data on monthly firm-to-firm transactions from Pakistan, we find that flood-affected firms are more likely to relocate to safer ground, and shift purchases towards suppliers in less flood-prone regions and reached via less flood-prone roads. The results indicate that firms are imperfectly informed about flood risk, and update their beliefs following floods. We quantify aggregate impacts using a spatial model of endogenous production network formation. The findings suggest that firms’ learning will shape the economic impact of increasingly frequent climate-related disasters.