Temperature and Production Efficiency Growth: Empirical Evidence

This paper examines the marginal effects of temperature on the growth rate and variability in growth rate of Total Factor Productivity (TFP) of a country, as measured by its production efficiency relative to a stochastic frontier. Using panel data for 168 countries for the period 1950-2014 to estimate a one-step stochastic frontier function, we find that temperature has a concave relationship with the growth rate of production efficiency and with the variability in this growth rate. We observe that hotter than the average temperature is not only detrimental to production efficiency growth but also makes the growth less stable than otherwise and these effects are larger in very hot countries with average annual temperature greater than 25 oC. More importantly, we observe that the detrimental marginal effects of higher temperature depend on the level of economic development of a country they are larger for poor countries relative to rich countries. Our findings have implications for the specification of climate damage functions in integrated assessment models and estimates of country-specific social cost of carbon.