Reevaluating the Productivity Effects of Extreme High Temperatures from the Perspective of Firm Dynamics : 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, which differs from the consensus of the literature that extreme (high) temperatures worsens productivity. We quantify these effects using a firm-dynamics model. The negative productivity effects of global warming are exaggerated if one overlooks firm dynamics