Title: Firm Adaptation in Production Networks: Evidence from Extreme Weather Events in Pakistan (Joint with Johannes Boehm and Mazhar Waseem)

 Abstract - This paper considers how far private adaptation may reduce future vulnerability to climate

change. Firms’ climate risk exposure depends not only on the location of production, but also

on network effects via the flood risk profile of suppliers and transportation links connecting

trading partners. We use data on monthly firm-to-firm transactions for the near-universe of

formal sector manufacturing firms in Pakistan and more than six billion observations from

commercial trucks traveling on the road network from 2011 to 2018 to study adaptation of

firms in production networks. We find that firms affected by major floods relocate to less flood-prone

areas, diversify their supplier base, and shift the composition of their suppliers towards

those located in less flood-prone regions and reached via less flood-prone roads. Identification

strategies that exploit both firm- and route-level flooding suggest that these responses reflect

forward-looking actions to reduce future vulnerability to flood risk rather than direct effects of

flooding, and are consistent with experience-based Bayesian updating. The results suggest that

the impacts of climate change will be mediated as firms learn from the experience of increasingly

frequent climate disasters.