Does environmental pollution influence household asset allocation? Evidence from China.

Abstract

This paper establishes a causal relation between households' decision of asset allocation and environmental pollution based on urban PM2.5 concentration data and a nationally representative survey in China. We find a significantly negative effect of environmental pollution on households' demand for housing assets but an inverted U-shaped effect on the demand for risky assets. The effects are remarkably robust to correcting the endogenous issue and a battery of robustness checks. Social interaction can partly explain such an effect of pollution. Furthermore, we also find that because households with lower economic status are at greater risk of exposure to environmental pollution and lack of economic capabilities, their holdings of financial assets decrease more than that of the households with higher economic status when faced with pollution; however, their holdings of low liquid assets declining less.