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In the Eye of the Storm: Firms and Capital Destruction in India

Author

Listed:
  • Martino Pelli

    (Université de Sherbrooke, CIREQ)

  • Jeanne Tschopp

    (University of Bern)

  • Natalia Bezmaternykh

    (Ryerson University)

  • Kodjovi M Eklou

    (European Department, International Monetary Fund)

Abstract

This paper examines the response of firms to capital destruction. Using Indian firm data we establish that tropical storms destroy up to 43% of firms’ capital. We use this exogenous shock to capital and find that within industry less productive firms suffer disproportionately more, both along the intensive (firm sales) and extensive (firm exit) margins. The effect found across industries is 33% larger, and indicates that capital destruction leads to a shift in sales towards comparative advantage industries. This build-back better effect is driven by firms active in multiple industries and, to a large extent, by shifts in the firm-level production mix within a firm’s active set of industries. Finally, while there is no evidence that firms adjust by investing in new industry lines, firms tend to abandon production in industries that exhibit lower comparative advantage. Our baseline estimates imply that for the top 25% of storms, the median firm’s industry sales decrease by at least 2.5% and the exit rate of the median firm increases by at least 2%.

Suggested Citation

  • Martino Pelli & Jeanne Tschopp & Natalia Bezmaternykh & Kodjovi M Eklou, 2019. "In the Eye of the Storm: Firms and Capital Destruction in India," Cahiers de recherche 11-2019, Centre interuniversitaire de recherche en économie quantitative, CIREQ.
  • Handle: RePEc:mtl:montec:11-2019
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    Keywords

    firms; capital destruction; creative destruction; hurricanes; India;
    All these keywords.

    JEL classification:

    • F14 - International Economics - - Trade - - - Empirical Studies of Trade
    • O10 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - General
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming

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