Coping with Blackouts: Power Outages and Firm Choices

Electricity is cited as one of the biggest impediments to firm growth in developing countries. In the World Bank Enterprise Survey (2006), 35.2% of Indian firms list electricity as the single biggest obstacle to business and report that power outages result in losses equivalent to 6.6% of annual sales. However, some businesses can adjust their means of production to cope with electricity shortages. The ability to re-optimize implies that electricity shortages may not necessarily decrease output because some firms will respond by changing their production processes and demand for inputs. In this paper, I study the consequences of interindustry heterogeneity in adaptation to electricity shortages on a firm’s output and profits. I use meteorological satellite data to construct an objective measure for the frequency of power outages. My results indicate that the impact of power outages varies by type of industry: an increase in the frequency of power outages lowers the output and profits of only some electricity-intensive industries.