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We examine the effect of air pollution on innovation activity by studying city-level patenting activities and Air Pollution Index (API) in China. We adopt a novel quasi-natural experiment of China’s Huai River policy, which provides subsidy of winter heating to cities north of the Huai River but not to cities to the south, to estimate the impact of air pollution on innovation performance. Based spatial regression discontinuity design, we find that API is 8.565 higher in the north and the number of patents per city is 29.1% lower in the north. Further analysis shows that one unit increase in API is associated with 6.7% reduction in the number of patent per city, suggesting that air pollution significantly impedes innovation activities.
JEL classification: O30; Q53.
Keywords: Air Pollution, Innovation; Patent; Huai River; Regression Discontinuity.