_HOTTER PLANET, HOTTER FACTORIES_ _3_ between 2006 and 2021. Using geomasked coordinates, we merge the WBES firm-level data with gridded historical monthly temperatures and relative humidity data between 1980 and 2021 obtained from the European Union’s Copernicus Climate Change Services (C3S). The gridded climate data have 0 _._ 25<sup>0</sup> _×_ 0 _._ 25<sup>0</sup> horizontal resolution, which is a grid of approximately 27 _._ 5 _×_ 27 _._ 5 kilometers (km). Climate change in this study refers to variations in climate patterns captured by temperature anomalies. We use both near-surface temperatures and relative humidity to calculate the wet-bulb temperature (WBT), which is used to calculate the heat index. The heat index is considered a good measure of heat stress conditions that can affect the human body.<sup>3</sup> Our main source of identification is the exogenous variation in area-level deviation of the WBT from the long-term average.<sup>4</sup> The area-level WBT is measured within a radius of 30 km around the establishment, and the area-level long-term average is the mean of the WBTs for each month between 1980 and 2021. We estimate a nonlinear regression model of log sales per worker—a good proxy for firm productivity—on WBT deviation, controlling for firm- and location-specific characteristics and country, subnational, region, and year fixed effects. We also perform heterogeneity analysis by firm size and industry classification, thus contributing to the rapidly growing literature that evaluates the impact of climate change on various aspects of the economy.

The economic impacts of climate change, particularly rising temperature, on agriculture and related sectors are now better understood and well documented in the literature (Mendelsohn et al., 1994; Schlenker et al., 2006; Deschˆenes and Greenstone, 2007; Cline, 2007; Fisher et al., 2012; Carter et al., 2018; Arag ́on et al., 2021). Most other studies provide estimates and predictions of aggregate impacts on output and economic growth. Studies on the micro-level impacts of climate change on firm productivity often focus on a few individual countries. This restricts our understanding of the possibly uneven and heterogeneous impacts of climate change across various climate zones and across countries in these zones.

Early studies that estimated or predicted the macroeconomic impacts of changes in temperature on production, investment, health, and agriculture showed that increasing temperatures have large and uneven negative effects on economic growth and output, particularly in poorer countries (Dell et al., 2012; Burke et al., 2015). Acevedo et al. (2020) shows that the negative effect of temperature on aggregate output in countries with hot climates—mostly low-income countries—runs through reduced investment, depressed labor productivity, poorer human health, and lower agricultural and industrial output. Heal and Park (2013) find a strong association between temperature deviations from average and per capita income.

> 3The US National Aeronautics and Space Administration considers the heat index as the “apparent temperature” or the temperature that the human body “feels”.

> 4In the literature, deviation from the long-term average or reference year is typically referred to as a temperature anomaly.