Labor Exposure to Climate Risk, Productivity Loss, and Capital Deepening

I find that exposed firms address heat challenges by shifting toward more capital-intensive production functions, increasing capital expenditures and R&D expenses, acquiring robotics-related human capital, and developing automation-related technologies. These effects are concentrated among firms facing large long-run temperature increases and among financially unconstrained firms. I further show that reduced labor efficiency relative to capital is one important mechanism underlying capital deepening and related automation investments. Finally, these capital responses mitigate heat-induced productivity losses, and investors appear to value firms’ adaptation capacity.