Climate Change and Adaption in Global Supply Flashcards
What is the main research question of the paper?
Do firms adapt their supply chains in response to increasing climate risk, specifically heat exposure at supplier locations?
What is the core hypothesis tested in the study?
Firms terminate supplier relationships when realized climate risk exceeds historical expectations, consistent with experience-based learning.
What is ‘realized vs. expected exposure’? (2)
- Expected: average # of hot days at supplier before relationship
- Realized: average # of hot days during relationship. Exceeding prior signals climate risk.
What empirical pattern do the authors find regarding supply-chain links?
Supplier relationships are 7.4% more likely to be terminated if realized heat exposure exceeds expectations.
What is the conceptual mechanism at play? (2)
- Firms use experience-based Bayesian learning
- They update beliefs about climate risk based on observed deviations from expected weather.
How do heat events affect firm performance? (2)
- Direct: Supplier profitability drops by ~13.8% (1 SD in heat)
- Indirect: Customers see a 0.6% fall in operating income/assets.
What does the study reveal about replacement suppliers?
Customers tend to switch to new suppliers with lower observed and expected heat exposure.
What type of climate risks are studied? (2)
- Primarily heat exposure
- Robustness checks also include floods.
How do firms respond to perceived heat risk aside from termination? (3)
- Increase inventory, R&D, and cash holdings
- Weak increase in supplier diversification
- No rise in M&A.
What role does country-level adaptation readiness play?
Terminations are more likely when suppliers are located in countries with low adaptation capacity (ND-GAIN).
How does the paper distinguish between permanent vs. transitory climate shocks? (2)
- Only persistent and unexpected increases in heat lead to terminations
- Temporary spikes do not
What is the role of supply chain structure in adaptation? (2)
- Stronger termination effect in competitive industries
- Weaker when firms are tightly integrated or highly reliant.
How does geographic concentration affect outcomes?
More concentrated suppliers show stronger negative impacts from heat due to limited operational flexibility.
What empirical strategy is used to identify the effect of heat?
Two-stage OLS: Supplier and customer income regressed on heat with fixed effects and lags to capture causal propagation.
What is the theoretical basis for firms’ learning process?
Experience-based Bayesian updating — firms observe deviations from expectations and adjust supply chains accordingly.
What are the key differences from earlier work on supply-chain shocks? (2)
- Prior work focused on disasters
- This study shows that gradual, persistent weather changes also propagate risk.
How are long-term climate projections used? (2)
- CMIP5 projections show firms adapt even when projections suggest low long-term change
- Showing reliance on short-run signals.
What variables are used to proxy firm and supply-chain characteristics? (6)
- Asset tangibility
- supplier count
- sales %
- HQ distance
- industry HHI
- input concentration.
What policy or managerial implications arise? (2)
- Firms need tools to assess and manage indirect climate risk
- They should factor in physical exposure in long-term sourcing decisions.
