EMPCT Working Paper Series No. 2024-08
82 pages | PDF Download | PDF in Browser
Citation:
Castro-Vencenzi, Juanma, Gaurav Khanna, Nicolas Morales, and Nitya Pandalai-Nayar , “Weathering the Storm: Supply Chains and Climate Risk” October, 2024
Juanma Castro-Vincenzi
University of Chicago
Gaurav Khanna
University of California, San
Diego
Nicolas Morales
Federal Reserve Bank of
Richmond
Nitya Pandalai-Nayar
University of Texas at Austin
and NBER
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 that suppliers exposed to climate risk charge lower prices. We develop a general equilibrium spatial model of firm input sourcing under climate risk. Firms diversify identical inputs from suppliers across space, trading
off the probability of climate disruptions against higher input costs. We quantify
the model using data on 271 Indian regions. 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 high input costs. While diversification
mitigates climate risk, it exacerbates the distributional consequences of climate
change by reducing wages in regions prone to frequent shocks.
