Real Estate Valuation and Cross-Boundary Air Pollution Externalities: Evidence from Chinese Cities

Within an open system of cities, compensating differentials theory predicts that local real estate prices will be higher in cities with higher quality non-market local public goods. In this case, more polluted cities will feature lower home prices. A city's air pollution levels depend on economic activity within the city and on cross-border pollution externalities. In this paper, we demonstrate that air pollution in Chinese cities is degraded by cross-boundary externalities. We use this exogenous source of variation in a city's air pollution to present new robust estimates of the real estate impact of local air pollution. We find that reductions in cross-boundary pollution flows have significant effects on local home prices. On average, a 10 % decrease in imported neighbor pollution is associated with a 0.76 % increase in local home prices. We also find that the marginal valuation of clean air is larger in richer Chinese cities, and hukou barrier of labor migration has been further phased out.