WAGES, HOUSING PRICES, AND AMENITIES: DO CHINESE HOUSEHOLDS AND FIRMS VALUE AIR POLLUTION

Abstract

Due to rapid urbanization, China has been experiencing critical levels of air pollution. This study utilizes hedonic estimation methods to understand demand in China for clean air. According to the Rosen-Roback model, the value of air pollution to Chinese households and firms can be determined by the differences in wages and housing prices between cities. This paper investigates how the housing price-to-wage ratio reflects the value Chinese households and firms place on air pollution. I calculate wage and housing price differentials in several Chinese cities and perform hedonic regressions on air pollution, population, and other amenities. The results of my regressions show that a one standard deviation decrease in air pollution concentration is associated with a 3.6% increase in the home price-to-wage ratio, implying that air pollution is predominantly capitalized as a disamenity to quality of life. I also show that cities with relatively more local attributes valued by both households and firms tend to have less air pollution, which suggests both parties are beginning to implicitly demand better air quality.