Project Research Theme 1: Firms, Frictions and Spillovers, and Industrial Policy, Research Theme 4: Trade and Spatial Frictions, Cross-Cutting Issue 1: Gender, Cross-Cutting Issue 2: Climate Change and the Environment

Firm Relocation as Environmental Policy: Impacts on Agglomeration, Workers, and the Environment

This project has been retired

Years active

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Funding category

  • Small Research Grants

As developing countries industrialise, the trade-offs between promoting economic growth while minimising externalities such as pollution become more binding. Government policy often seeks to influence this trade-off in the social interest. Understanding the impact of these policies on environmental outcomes is important, however, since these environmental policies also directly impact firm decisions, they provide a lens to test theories of firm interactions that contribute to our understanding of firm behaviour and economic development. This project examines how the presence (or absence) of industrial activity affects air quality, the location choice of workers, as well as firms with linkages to the relocated firms and therefore agglomeration.

The researchers leverage a policy which relocated roughly 20,000 firms operating in Delhi to industrial areas outside the city, and did so randomly, between 2000-2016. Due to a shortage of industrial plots in the industrial areas when the policy began, allotment of these plots was done via a series of lotteries spanning 2000 through 2011. These lotteries provide a unique source of random variation to answer the research questions. The researchers administered a survey to measure the contemporary outcomes of relocated firms in the largest industrial area, and use administrative data on the firms’ origin locations, products, and lottery timing. They use their own and others’ satellite-based measures of air pollution, and night time light intensity as a measure of regional economic output. They supplemented these datasets with the economic and population censuses of India. The lotteries mean that different concentrations of eligible firms left neighbourhoods throughout Delhi at different (random) times, creating variation in polluting firm presence by neighbourhood. Firms’ neighbours in the industrial area were also determined by lottery, allowing the researchers to determine how their characteristics impact each other’s economic performance through agglomerative forces.

This research is some of the first to illustrate the impact that small-to-medium-sized firms have on pollution in developing countries. Low-income country firms are overwhelmingly of this size, which is not suitable for direct monitoring of emissions as is common for large firms in developed countries. Using indirect, causal evidence on their contribution to emissions is therefore key to organise efforts to prioritise emission cuts in low-income countries to mitigate climate change. Also, firm relocation policies are a common instrument throughout world for moving emissions away from high-population-density areas.

The researchers conduct a cost-benefit analysis of the Delhi policy, finding that the health benefits of reducing pollution exposure in high-population-density areas at least double the costs in terms of value lost from exiting relocated firms and reduced economic output in high population density areas.

Small Research Grants

Closed • Deadline • Small Research Grants

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