Weizeng Sun, Siqi Zheng and I have just released a new NBER paper titled "Clean Air as an Experience Good in Urban China". In this blog post, I want to talk about our paper and make some general points about the persistence literature.
Here is the key logic chain for understanding our paper's main ideas and its contribution to the literature.
1. Before the COVID crisis of 2020, air quality was improving in many Chinese cities.
2. Some other Chinese cities continued to have very bad air pollution.
3. The COVID induced shutdown of the economy in 2020 sharply reduced air pollution in many Chinese Cities.
4. This improvement in the local public good has an "experience effect" as urbanites learn about their own demand for a good that they do not have much experience with.
5. In the aftermath of the economic shutdown, an adherent of the stationary Environmental Kuznets Curve hypothesis would predict that as the economy revs up again that pollution will start to rise back to the trend line.
6. In contrast, if Clean Air is an experience good, then in the cities where the air quality significantly increased AND the subset of those cities where people greatly value clean air --- then in this smaller set of cities, the populace will put pressure on local officials to increase "green regulation".
7. We identify the subset of cities in #6 and we document that in these cities there is an increase in the new planning documents in the count of efforts to encourage the growth of local green industry.
In writing this paper, I am trying to nudge urban and environmental economists to think about when will short run shocks have persistent medium term consequences. The answer hinges on how people react to the short term shock.
The empirical persistence literature in economics hasn't been that clear about "mechanisms". Given that people are finite lived, how can a shock to one generation affect a place in later generations? Do the elderly tell their grandkids stories and this leads to transmission? Or do the laws change of the place and this affects the Tiebout equilibrium such that different people and firms move to the area and the place replicates as young Berkeley hippies move to Berkeley and replace the elderly Berkeley hippies in the OLG model?
Our paper is also one of the first to connect experience goods to local public goods. In this case, everyone in the affected area has a similar experience and this helps to reduce co-ordination costs. Usually, an experience good is something like a new science fiction movie such as Star Wars.
