Air pollution and manufacturing productivity: Understanding the roles of technology and adaptation

I analyze the impact of air pollution on manufacturing productivity in India, examining how technology and adaptation influence the damages. Using firm panel and satellite-derived pollution data, I estimate the effect of pollution on productivity, with wind velocity serving as an instrument for air pollution. While sensitivity is detected among labor-intensive industries, no meaningful average effect is found. To explain these patterns, I present a model showing that firms adapt by lowering output to mitigate pollution damages and that industries’ production technology contributes to heterogeneity. Applying the model, I estimate that a one standard deviation increase in the labor intensity of production technology results in a 0.6 percentage point greater negative impact of pollution on productivity. The findings imply that the damages of pollution to profits are twice as high among adversely affected industries than the average and four times higher when inputs remain fixed relative to when they adapt.