Speaker: Tarikua Erda

Title: Adjustment Costs, Technology Adoption, and Productivity

Fixed costs of installing new capital drive lumpy investment, yet little is known about the productivity implications. Using confidential US Census microdata and an event study design, I examine how manufacturing plants’ productivity recovers after they rebuild from large, exogenous floods that destroy their capital. Flooded plants overshoot their pre-flood labor productivity baseline by ~7% because they make extensive, simultaneous upgrades to their machinery during their rebuilding process that they may not otherwise have made in their business-as-usual investment episodes. Moreover, as flooded incumbents replace their capital and plants forced to exit due to the disaster sell off their assets, I trace that the resulting excess supply of second-hand machinery is acquired by local young plants. However, this used capital potentially locks young firms into old technology, restricting their productivity and long-term survival. My findings demonstrate novel causal evidence on capital adjustment costs as a barrier to the adoption of productivity-enhancing technologies, and on the critical role of technology for young firms. This paper also sheds new light on climate hazards as a powerful yet overlooked driver of capital depreciation and reallocation in our warming world.