Power outages, multi-product firms, and firm productivity: Theory and evidence from China

Abstract

This study develops a model of multi-product firms (MPFs) to examine their responses to power outages and the consequent effects on firm productivity. In the model, MPFs mitigate the adverse effects of power outages by discontinuing their less-productive products and focusing more on their core varieties. This buffering mechanism, however, comes at the cost of reduced product variety and a more concentrated product mix. We test this theory using firm–product-level export data from the Chinese metals and articles thereof industry from 2005 to 2015, combined with a text-based power outage index. Consistent with the model’s predictions, we find that a 1% increase in power outages reduces the productivity of single-product firms (SPFs) by 0.43%. MPFs experience a 0.31% smaller decline in productivity; however, this comes at the expense of a 0.20% reduction in product variety within these firms. We further calibrate the model and show that a 1% reduction in the observed 2005 outage level raises aggregate welfare by 0.017%, of which more than one-third is driven by MPF-specific within-firm reallocation and variety recovery. Our theory reconciles the findings on the impacts of power outages across countries, underscoring the critical role of the intra-firm extensive margin in economic loss assessments.