workers. Balboni et al. (2023) demonstrate that manufacturing firms responded to flooding in Pakistan by diversifying towards suppliers located in less flood prone regions. Similarly, floodaffected firms in Tanzania adjusted their supply networks, and also reallocated resources toward inventory and backup capacity (Rentschler et al. 2021). Firms also reallocate their capital structure: using cross-country firm-level data. Javadi et al. (2023) show that climate change exposure is associated with an increase in firm-level cash holdings as a form of precautionary savings.

On the outputs side, firms tend to reallocate their sales to shield profits from climate risk. In the global automobile industry, Castro-Vincenzi (2023) found that manufacturers reallocated production across plants within a firm in response to flooding, leading to firm-level efficiency losses. Similar effects obtain across firms: Chinese manufacturers reallocated away from domestic buyers following typhoons (Elliott et al. 2019), while in Japan, transactions shifted away from firms in earthquake-affected regions (Carvalho et al. 2020).

Reallocation is costly, because such changes represent a deviation from what were optimal allocations before climate risk: holding cash has an opportunity cost, identifying new suppliers and buyers requires investment, and reallocation of output implies efficiency loss. Despite these challenges, evidence suggests that firms are remarkably resilient; for example, the negative effects of natural disasters appear short-lived (Elliott et al. 2019; Pelli et al. 2023) However, whether preemptive adaptation directly increases such resilience has not yet been studied.

Firm relocation is perhaps the costliest form of private adaptation. Both Indaco et al. (2021) and Balboni et al. (2023) find evidence for firm relocation following flooding events in the United States and Pakistan. Such relocations are an important form of adaptation and can reduce the costs of future climate events but may increase spatial inequality (Cruz and Rossi-Hansberg 2023).

Sectoral reallocation is an essential economy-wide adaptation, because climate change creates new patterns of comparative advantage both within and across countries. Because productivity in services and manufacturing are less affected by heat than is agriculture (Nath 2021), climate change will reallocate economic activity away from agriculture. These economy-wide adaptations can have dramatic effects; in India, reallocations away from agriculture reduced the losses from extreme heat by 69 percent from 2001–2007 (Colmer 2021). Indeed, climate-induced reallocations of firm activity may even _increase_ aggregate productivity. Because less productive firms are more likely to exit, climate stresses and natural disasters can reallocate resources to the most efficient firms (Xie 2022) and better performing industries (Pelli et al. 2023). However, there may be allocation constraints, particularly in EMDEs, including both the ability of the manufacturing sector to absorb labor (Colmer 2021) and trade barriers (Nath 2021). Further research is needed on constraints on climate-induced reallocation, particularly the role of internal factor immobility and incomplete markets.

Technology adoption can mitigate the negative effects of climate shocks. In particular, rising global temperatures are likely to substantially increase the demand for cooling devices (Mansur et al. 2008). In India, cooling technologies have been shown to offer at least partial protection against 9