Negotiating Housing Deal on a Polluted Day: Consequences and Possible Explanations

Abstract

The topic of air pollution has drawn considerable attention globally. In this paper, we examine the immediate effect of air pollution on a substantial decision, that is, a housing purchase. By linking housing purchasing behavior with the air quality in Beijing, we document market participants’ behaviors unexplained by rational economic theories. Our main result suggests that an increase of the PM2.5 by 100 on the day of the negotiation leads to an approximately 0.19% increase in the per square meter transaction price. Using heterogeneous analyses, we rule out rational explanations and demonstrate that our empirical results are consistent with behavioral theories under weak assumptions.

Keywords: Air Pollution, Housing Market, Salience, Projection Bias

JEL Classification: D91, R31, L85, Q51