AERE@ASSA - Extreme Heat and Directed Innovation

Abstract

Can economies innovate their way out of climate trouble? I provide the first systematic evidence outside agriculture that firms adapt to extreme heat through directed technological change. Linking firm-level data with patent records for nine EU countries (2000–2020), I establish three findings. First, extreme heat operates as a labor-biased productivity shock: labor-intensive firms suffer disproportionate losses and cede market share to capital-intensive competitors. Second, firms respond by shifting production toward capital and redirecting innovation toward labor-saving technologies, with the strongest responses in labor-intensive industries facing the greatest heat exposure. Third, this endogenous innovation response has quantitatively meaningful consequences: labor-saving patents filed in response to heat attenuate aggregate productivity losses by 26 percent over the study period. These findings demonstrate that innovation is not merely a driver of growth but an active margin of climate adaptation.