Climate change is making extreme weather events more likely. The impact of such events on firms and populations in developing countries will depend crucially on how well they are prepared for these scenarios, and how easily they can adapt to them. In this project, Clare Balboni and Johannes Boehm aim to understand the response of Pakistan’s manufacturing firms to the extreme floods of 2010 and 2014. They seek to estimate both the impact on firms that were directly affected because of their geographic location, as well as the impact on firms that were indirectly affected through disruptions to vertical linkages or factor markets. They also look to understand to what extent firms make adaptive decisions in the aftermath of flood events that may help to limit their exposure to future floods.
The project's approach combines micro-founded structural econometric models with two novel datasets. To measure firm sales outcomes, georeferenced microdata on domestic firm-to-firm transactions is used along with import and export transaction data. To measure the extent to which supply routes are affected by the floods, high-frequency geospatial data from GPS trackers installed on road vehicles is employed and, from this, accurate data on supply routes, traffic conditions, flood disruptions, and adaptation of shipping firms is constructed. Using this data, the researchers will develop a structural spatial general-equilibrium model, which they can then use to investigate firm responses to flooding and to run counterfactuals.
This project will inform policymakers about the importance of road infrastructure and disaster relief projects that seek to rebuild and improve resilience in the infrastructure field; and improve firms’ and policymakers’ understanding of the challenges posed by – and appropriate responses to – the evolving risks of extreme weather events as the global climate changes. Understanding the full spectrum of impacts that extreme weather events have on firms, including via indirect channels such as disruptions to their supply chain networks, is crucial in quantifying the costs of natural disasters and anticipating the future effects of climate change as these events become more frequent and severe. Furthermore, understanding how firm expectations and adaptive behaviour responds to these events is also relevant to policy: if firms are not (or not fully) anticipating an increased likelihood of extreme weather events or are not reacting to it, they will be more severely affected by them.
