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Firm Innovation in Hazy Days: Chinese Evidence

Published version
Peer-reviewed

Repository DOI


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Authors

Wan, L 
Liu, Y 
Lv, K 

Abstract

jats:titleAbstract</jats:title>jats:pThis paper estimates the causal effect of air pollution on firm innovation based on a nationwide sample of Chinese manufacturing firms. Using thermal inversion as instrument variable (IV), we demonstrate that air pollution significantly hurts firm innovation performance: a 1% increase in air pollution (PMjats:sub2.5</jats:sub>) in the past year, from its mean value, amounts to a 1.5% decrease in the number of invention patents compared to the average between 1999 and 2013. We also provide the casual estimate using regression discontinuity design (RDD) by exploiting the exogenous variation in pollution level caused by China’s Huai River policy: the decrease in firms’ invention patents is approximately 2.2% in the regions north of the Huai River Line. The underlying mechanism analyses reveal that poor air quality has detrimental effects on labor productivity, firms’ human capital accumulation, and financing ability. These findings highlight the substantial costs associated with air pollution, which are greater than previously thought, as it hinders innovation, a crucial driver of long-term economic growth.</jats:p>

Description

Keywords

38 Economics, 3801 Applied Economics, Climate-Related Exposures and Conditions, 11 Sustainable Cities and Communities

Journal Title

Environmental and Resource Economics

Conference Name

Journal ISSN

0924-6460
1573-1502

Volume Title

87

Publisher

Springer Science and Business Media LLC
Sponsorship
National Natural Science Foundation of China (72033005)
National Social Science Fund of China (21ZDA065)