Water stress and industrial firm productivity

We estimate the causal effect of water stress on firm-level productivity in China. In contrast with most extant studies that have employed precipitation to proxy water availability, we use local water runoff, which we argue is a more appropriate measure of water available for industrial firms. By matching a panel for over half a million formal industrial firms with a novel, county-level, dataset on water runoff, we find that shocks to local water runoff exert asymmetric effects on firm productivity. A negative runoff shock reduces firm productivity by 1.93 – 5.40 per cent, depending on its magnitude, whereas the corresponding positive shock has a small and not statistically significant effect. Water runoff consistently outperforms other proxies of water availability across different horserace specifications. The main channels through which negative runoff shocks affect firms operate through reduced water inputs, disruptions to power generation, and tighter cash flows. Our study sheds new light on how climate change can impede economic development.