Conference Agenda

Climate change has disruptive effects on economic activity. This paper focuses on one channel through which this disruption materialises: contract suspension. If adverse weather conditions force the interruption of work, contractual payments to the firms assigned to the project are delayed. The delay imposes several costs on these firms. They experience lower liquidity due to deferred payments, coupled with uncertainty regarding the duration of the suspension. Concurrently, firms cannot fully reduce their labour and capital costs, since they may have to suddenly resume work when the suspension is lifted. I quantify these costs using data on Italian construction firms and public infrastructure projects, obtained from a new database on the universe of public procurement contracts in the country. The suspension channel is isolated with a staggered DiD design matching similar firms. Suspensions lead to extensive financial damages, with sales dropping on average by 30%, employment by 15.3%, and total assets by 18.5% in the years after a firm’s first suspension. This contraction in firm operations arises both from the adverse liquidity effects of weather suspensions, and from their knock-on effects on firms’ other contracts, which are also hit by delays.