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

Posted: 21 Mar 2014

See all articles by Siqi Zheng

Siqi Zheng

Samuel Talk Lee Professor of Urban and Real Estate Sustainability, Faculty Director of MIT Center for Real Estate

Jing Cao

Tsinghua University

Matthew E. Kahn

University of Southern California; National Bureau of Economic Research (NBER)

Cong Sun

Shanghai University of Finance and Economics

Date Written: March 20, 2014

Abstract

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.

Keywords: Air pollution; Cross-boundary externality; Hedonic; Chinese cities

Suggested Citation

Zheng, Siqi and Cao, Jing and Kahn, Matthew E. and Sun, Cong, Real Estate Valuation and Cross-Boundary Air Pollution Externalities: Evidence from Chinese Cities (March 20, 2014). Journal of Real Estate Finance and Economics, Vol. 48, No. 3, 2014, Available at SSRN: https://ssrn.com/abstract=2412151

Siqi Zheng

Samuel Talk Lee Professor of Urban and Real Estate Sustainability, Faculty Director of MIT Center for Real Estate ( email )

Building 9-323
Cambridge, MA 02139
United States

HOME PAGE: http://https://siqizheng.mit.edu/

Jing Cao (Contact Author)

Tsinghua University ( email )

Beijing, 100084
China

Matthew E. Kahn

University of Southern California ( email )

2250 Alcazar Street
Los Angeles, CA 90089
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Cong Sun

Shanghai University of Finance and Economics ( email )

777 Guoding Road
Shanghai, AK Shanghai 200433
China

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