Pricing for the clean air: Evidence from Chinese housing market

Air pollution is widely believed to cause healthy risks and influence nations' economic dimensions. This paper investigates the impact of air pollution on housing prices in China's 286 prefectural-level cities during 2005-2013. To address the endogeneity problem of PM2.5 concentrations in our regression, we propose an instrument variable strategy based on ventilation coefficient. The estimation results suggest that a 10% increase in PM2.5 concentrations causes a 2.4% reduction in local housing prices. Air pollution also hinders the progress of urbanization, limits cities' human capital formation and changes people's expectations of housing prices that we interpret as three potential mechanisms behind our main findings.