Extreme High Temperatures, Firm Dynamics and Heterogeneity, and Aggregate Productivity: The Case of Chinese Manufacturing

We study how extreme (high) temperatures affect firm dynamics---entry, exit, and aggregate productivity---in Chinese manufacturing sectors. Existing studies focus on the effects on incumbent firms (intensive margin), while we examine the effects on entry and exit (extensive margin), and their relationship with the aggregate productivity. Extreme temperatures lower the productivity of incumbent firms (productivity effects), while selecting firms with higher productivity to survive (selection effect). Exploiting a unique data set on the registration information of the universe of firms allows us to document this novel general equilibrium mechanism, whereby resources released by eliminated low-productivity firms are reallocated to firms with higher productivity. Thus, the combined effects on aggregate productivity are muted, a finding that differs from the consensus in the literature that extreme (high) temperatures worsen productivity and economic outcomes. We quantify these effects using a heterogeneous firm framework a la Melitz (2003). The results shed light on the importance of firm dynamics in stipulating climate policies.