Essay, Pages 4 (879 words)
The paper tried to investigate the impact of temperature on economic outcomes by using firm level data and daily weather data. It tried to answer the question whether temperature has impact on industrial firms’ profit through different channels. The mechanism that temperature affects profit is through industrial output, total factor productivity and investment. The findings revealed nonlinear relationship between temperature and profit that exhibited in down ward parabola relationship; accordingly, there is direct relationship between profit and high summer temperature and inverse relationship between profit and high winter temperature.
Moreover, the paper projected the impacts of future warming on profit by 2050 and found firms’ profit is projected to decline annually by certain considerable amount. The paper imply climate adaptation polices focusing on the Chinese manufacturing sector should prioritize developing strategies to reduce the adverse impacts of high temperatures on output, TFP, investment, and capital stock
Regarding the novelty and the contribution of the paper, the problem studied and the results obtained are not new and it is not the first to address the research question as claimed by the authors but the paper’s main contribution to its relevant literature is undeniably important.
Comparing this paper with previous similar efforts, it adds knowledge to the existing literature.
On building the theoretical framework, the paper has explicitly based on the traditional theory of firm where the sole objective of a firm is to maximize profit, the firm operates under perfect competitive market and produce single output. In articulating the theoretical model there is a better and realistic alternative theory that the authors have ignored.
Using modern theory of firms with the assumptions firms maximizes other objectives; produce multi products and considering realistic markets may improve the paper.
In lieu of these , a possible alternative to the representative firm approach could be agent based model which are capable of dealing with many heterogeneous firms opposed to heterogeneity , irrelevant assumption and firms are not rational agents that constrained by computational bounds. Another alternative is to construct dynamic stochastic general equilibrium models with heterogeneous firms.
The identification strategy improved upon the previous efforts and the data are well-suited to address the research questions as the authors used two data sources; firm level data collected from firms that produce over 85% of Chines total industrial output for the year 1998-2007 and daily weather data. The daily weather data includes temperature, rainfall, sunshine hours, air pressure, relative humidity and wind speed for the year 1998 to 2007. The firm level data and county level weather data by county and year merged to form unbalanced panel with 1347937 observations for the years 1998 to 2007.
Although, the data seems well-suited to answer the mentioned research questions and the features of the data are unique similar dataset used by previous studies, the paper not clearly indicated the attrition rate and the mechanism dealt with the attrition, which may raise questions on the obtained results.
The empirical model that the authors employed correctly specified and the interpretation of the coefficients of interest are clear and correct. The paper includes efforts to identify potential mechanisms, the mechanisms explored are the right ones but it should consider other mechanisms.
The findings revealed the nonlinear relationship between temperature and profit. There is direct relationship between profit and high summer temperature and inverse relationship between profit and high winter temperature. Accordingly, one degree centigrade increases in summer temperature decreases profit by (3.8 – 6.2) % and one degree centigrade increases in winter temperature increases profit by (3.4 – 4.6) %. The relationship between profit and temperature follows downward parabola. This result is consistent with the result that obtained on the impact of temperature on industrial output and global economic productivity.
The transmission mechanism is industrial output decrease with increase temperature, as increased temperature affects total factor productivity and investment and high temperature increases labor cost as government regulation requires that employees provide high temperature subsidies to workers during days with daily maximum temperature.
High temperature decreases firms’ innovation activities as evidenced by decreasing share of new products sale. There is heterogeneity effect of temperature on profit across regions, ownership type and industries. High temperature has high impact on profit on firms located in east China compared to state owned other regions. Domestic firms have high impact compared to foreign owned and state owned firms.
Among 39 two digit industries covered in the study such as special equipment manufacturing, stationary and furniture affected by decreases profits with high temperature. Firms that produces indoor decreases profit with high winter temperature, on the other hand firms that produce outdoor decreases profit with summer high temperature.
The paper includes a set of alternative specifications, estimation and sample robustness checks however, additional robustness checks should administered adequately in order to address some robust estimates like using mean deviation of temperature and compare with the estimated result by using average temperature.
Finally the effort that authors exerted to link temperature with economic outcome variables is appreciable and well done. However, the authors should consider the following minor comments and/or questions:
· omitted key works in the literature review section should be incorporated.
· serving the readers be better by providing some additional tables/graphs but some tables/graphs should self-contained in the main body of the report
· the (policy) implications of the paper is not clearly spelled out in the abstract part