The Relationship between Air Quality and Financial Risk Aversion: A View of Hetero‐Geneous Response to Air Pollution

• Published in: Developing economies Vol. 63; no. 2; pp. 183 - 206
• Main Authors: Ma, Xunzhou, Liang, Liurong, Wu, Zhen‐Xing, Cao, Zhicheng, You, Yibo, Xue, Cheng
• Format: Journal Article
• Language: English
• Published: Kyoto, Japan Wiley Publishing Asia Pty Ltd 01.06.2025; INSTITUTE OF DEVELOPING ECONOMIES - JETRO
• Subjects: Affects; Air pollution; Air quality; Behavior; China; Cognitive ability; Concern about air quality; Emotional responses; Financial risk aversion; Outdoor air quality; Risk; Risk assessment; Risk aversion; China
• ISSN: 0012-1533; 1746-1049
• DOI: 10.1111/deve.12426

This paper conducts experiments on a sample of subjects from Chengdu and Wuhan, China, who are mostly unconcerned about air pollution. We provide evidence on the relationship between air quality and financial risk aversion by assessing the plausibility of two channels: affects and cognitive ability. We find that air pollution increases the financial risk aversion of subjects who are concerned about it by altering their emotional responses. However, the cognitive abilities of our subjects are not affected by air pollution, regardless of whether they are concerned about the pollution or not. Meanwhile, we show that reference dependence effect can explain why most subjects in our sample are not highly concerned about air quality. The results of our study stress the importance of beliefs about the impact of air pollution in determining the relationship between air pollution and human behavior.