The effect of urban air pollution on small businesses: Evidence from Beijing

The social cost of pollution avoidance behavior has received less attention than the health impact of air pollution. We attempt to shed light on the effect of a particular pollution avoidance behavior, reducing outdoor activities, on small businesses that rely on the customers visiting their premises. We employ an instrumental variable strategy to estimate the causal effect of air pollution on business performance of ninety-six restaurants from three groups of chain restaurants located in Beijing that have similar characteristics but experience varying levels of air pollution due to their different location. We show that air pollution has an adverse effect on business performance of restaurants, especially on weekends when most people can choose to stay indoors to avoid air pollution since they do not have work or school related obligations. In contrast, the adverse effect on weekdays, when the opportunity cost of not meeting work and school related obligations is high, is relatively weaker and less robust.