Pollution effects of place-based policy: Evidence from China's development-zone program

Abstract

Environmental externalities of place-based policy have generally been overlooked despite their welfare consequences. This paper studies the air-pollution effect of development zones in urban China using a geo-coded data set of 2720 counties from 1998 to 2016. By adopting the generalized difference-in-difference framework to resolve the problem of endogenous locational selection for place-based policies, we find that development zones reduce ambient PM_2.5 concentration by around 1.8%, leading to a total social gain of $7.75 billion USD. The environmental benefit varies by the zone's dominant industry, geographical region, administrative affiliation and time of establishment. We further show that development zones are comparably cleaner due to the incentives of central and local governments, manifested by the desire to administratively promote development zones, the attempt to satisfy residential demands for higher quality-of-life cities, and the employment of the national environmental monitoring system.