Air pollutions and loan decision bias

Abstract

Studies have largely discussed the impact of air pollution on the stock market. However, the latter requires certain financial knowledge and certain income, which may lead to sample selection bias. To address this concern, using unique data from online peer-to-peer lending platform, namely, RenRenDai, this paper analyzes the effects of air pollution on loan decisions in China. In the identification strategy, we use approximate exogenous and random daily level air pollution to alleviate the endogenous problem. In a preferred specification, results show that air pollution has significant positive effects on loan amounts with elasticity of 0.013. Such result is driven by health expenditure and behavioral bias. Specifically, after air pollution rises for two or three days, individuals will then increase loan amounts for health and consumption. However, air pollution has no proof of increasing investment. Our study provides new evidence on the effects of air pollution on cognitive performance, particularly on financial behavior. It then reveals the mechanism how air pollution influences loan decisions. In view of the negative impact of air pollution, we also need to know the risks it poses to the financial industry.