Air pollution and entrepreneurship

Abstract

We investigate the effect of exposure to air pollution on entrepreneurship using panel data from the China Health and Retirement Longitudinal Study. To address endogeneity arising from location choices and omitted variable bias, we employ a two-way fixed effects model with an instrumental variable approach. We find that adults exposed to high levels of air pollution are unlikely to become employer entrepreneurs or have diversified household entrepreneurial activities. Specifically, a one unit increase in air pollution leads to a decrease in the propensity for entrepreneurship by 1.6 percentage points and a decrease in the likelihood of household entrepreneurial diversity by 2.1 percentage points. We find that risk propensity, networking consumption, self-efficacy, and the city's highly educated migrants are the main channels through which air pollution impacts entrepreneurship. Our findings also reveal that air pollution has a more significant negative impact on individuals with lower education levels compared to their more educated counterparts.