Abstract
Using a dual-market sorting model of workers’ location decisions, this paper studies the capitalization of air pollution in wages and property prices across Chinese cities. To account for endogeneity of air pollution in the determination of wages and property prices, we exploit quasi-experimental variation in air quality induced by a policy subsidizing coal-based winter heating in northern China, and document a discontinuity in average air quality for cities located north and south of the policy boundary. Using data for all 288 Chinese cities in 2011, we estimate an equilibrium relationship between wages and house prices for the entire system of Chinese cities, and specify a regression discontinuity design to quantify how variation in air quality induced by the policy affects this relationship locally. Our preferred estimates of the elasticity of wages and house prices with respect to $$\text {PM}_{10}$$ concentration are 0.53 and $${-}$$ 0.71 respectively. At the average of our sample, the willingness to pay for a unit reduction in $$\text {PM}_{10}$$ concentration is CNY 261.28 ( $$\simeq $$ USD 40.50), with a significant share reflected in labor market outcomes.
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