Missing repayments on haze days: Evidence from China

Abstract

This study examines the impact of air pollution on a universal financial decision that is cognitively less demanding. Based on 281,314 repayment records from a leading P2P lending platform in China, we find that borrowers are more likely to miss their repayments when the scheduled repayment days witness heavier air pollution. A deterioration of air quality from “excellent” to “severely polluted” is associated with an instantaneous and transitory increase in delinquency rate by 143.3 basis points (11.3%). Instrumental variable estimates based on pollution transport via wind or thermal inversion show similar results. Our findings are consistent with air pollution prompting borrowers to forget their repayment obligations, which do not indicate financial distress. However, pollution-induced delinquencies reduce borrowers’ credit ratings and success rates of future loan applications, with the effect being as large as that due to delinquencies unlikely to be driven by pollution, implying a misallocation of credit.