Do agglomeration economies are lower for polluting sectors?

This article explore how the relation between productivity and local city-size can be mitigated by pollution. More specifically, we estimate agglomeration economies considering a new source of heterogeneity among industries: the degree of pollution. Due to pollution perception acting as a dispersion force, we expect net agglomeration economies to be lower for polluting firms. In fact, polluting firms may anticipate that households and other firms are reluctant to locate near sources of pollution. In this paper, we exploit spatial data on sectoral emissions for a large number of air pollutants. We define a continuous variable of pollution that varies across sectors and employment zones. Our …