Transitory shocks, persistent ripples: how does customers’ rainstorm exposure induce demand uncertainty and affect suppliers’ cost elasticity?

This paper explores the indirect economic consequences of climate risk transmitted through supply chain interactions. Using daily meteorological data and a sample of Chinese manufacturing firms from 2001 to 2022, we construct a firm-specific measure of customer rainstorm exposure. We document that downstream customers’ exposure to severe rainstorms significantly reduces the cost elasticity of their upstream suppliers. Mechanism analyses indicate that customer rainstorm exposure disrupts downstream operations and heightens suppliers’ perceived demand uncertainty. In response, suppliers adjust their cost behaviour primarily by retaining raw materials and labour resources. Cross-sectional tests reveal that this effect on cost elasticity is mitigated among family-owned firms, firms with higher artificial intelligence adoption, and suppliers with greater operational diversification, stronger pricing power, and broader geographic customer dispersion. These findings highlight the previously underappreciated breadth and persistence of the real economic impacts of climate shocks.