Entry, exit, and market structure in a changing climate

Abstract

Extreme temperatures have long-run effects on the size and composition of a country’s business sector. Administrative data on the universe of Italian firms show that higher temperatures slow the growth of active firms in the market, mainly due to a drop in entry rates and an increase in exit rates in warmer areas. Balance sheet data analyses suggest a dichotomy between large, young companies, which adapt and survive improving their profitability, and older, smaller-sized firms persistently suffering from hot temperatures. According to an average climate scenario, temperatures will impact business dynamics further in the future, exacerbating the differences between warmer and colder areas.