Firm Presence, Environmental Quality, and Economic Activity: Evidence from Randomized Relocation of Small Firms

Working Paper
Published on 9 August 2023


Firm location decisions are one of the most important decisions managers make, optimizing factors such as proximity to customers, suppliers, and useful information. The inherent endogeneity of firm location decisions renders estimating the impact of firm presence difficult. In this paper, we use an environmental relocation policy that randomly moved over 20,000 small firms operating within city limits in New Delhi to industrial areas outside the city over several years. We find that a reduction in firm presence has no impact on measured air quality, but is costly for firms: relocated firms have a high rate of exit, which increases in the distance relocated. The lack of effects on ambient fine PM can be rationalized by the fact that industrial sources are not a large contributor to fine PM in Delhi. There are no long-term effects on population density or composition.


Michael Gechter

Penn State University

Namrata Kala

Massachusetts Institute of Technology