Air Pollution and Manufacturing Firm Productivity: Nationwide Estimates for China

61 Pages Posted: 21 Apr 2017 Last revised: 29 Apr 2021

See all articles by Shihe Fu

Shihe Fu

Xiamen University - The Wang Yanan Institute for Studies in Economics (WISE)

V. Brian Viard

Cheung Kong Graduate School of Business

Peng Zhang

Hong Kong Polytechnic University - School of Accounting and Finance

Date Written: May 20, 2018

Abstract

An emerging literature estimates air pollution’s effects on productivity but only for small groups of workers of particular occupations or firms. To provide more comprehensive estimates necessary for nationwide policy analysis, we estimate effects for a nationally representative sample of China’s manufacturing firms from 1998 to 2007 and capture all channels by which pollution influences productivity. We use thermal inversions as an instrument to estimate the causal effect of pollution on productivity. A one μg/m3 decrease in PM2.5 increases productivity by 0.82% with an elasticity of -0.44. Firms respond by hiring more workers attenuating the elasticity to -0.17. Using the differential effect of China’s accession into the WTO on coastal versus inner regions, we estimate the causal effect of output on pollution (elasticity of 1.43) to simulate the dynamic, general-equilibrium effects of PM2.5 yielding an elasticity of -0.28. An exogenous 1% decrease in PM2.5 nationwide increases annual productivity by CNY 35.9 thousand for the average firm and CNY 5.7 billion or 0.039% of GDP nationally.

Keywords: air pollution, productivity, environmental costs and benefits, firm competitiveness

JEL Classification: D62, Q51, Q53, R11

Suggested Citation

Fu, Shihe and Viard, V. Brian and Zhang, Peng, Air Pollution and Manufacturing Firm Productivity: Nationwide Estimates for China (May 20, 2018). Available at SSRN: https://ssrn.com/abstract=2956505 or http://dx.doi.org/10.2139/ssrn.2956505

Shihe Fu

Xiamen University - The Wang Yanan Institute for Studies in Economics (WISE) ( email )

A 307, Economics Building
Xiamen, Fujian 361005
China

V. Brian Viard (Contact Author)

Cheung Kong Graduate School of Business ( email )

Oriental Plaza, Tower E3
One East Chang An Avenue
Beijing, 100738
China
86-10-8518-8858 (Phone)
86-10-8518-6800 (Fax)

HOME PAGE: http://english.ckgsb.edu.cn/faculty_content/brian-viard

Peng Zhang

Hong Kong Polytechnic University - School of Accounting and Finance ( email )

Hung Hom
Kowloon
Hong Kong

HOME PAGE: http://pengzhang.weebly.com

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