Home production function and the productivity effect of air pollution

Abstract

This article examines whether there is an indirect productivity effect of pollution on preference. In doing so, an indirect productivity effect is introduced into the home production function. The estimates show that there is a strong positive indirect productivity effect on preference.

Notes

¹ Pollution is also emitted through production. However, I simplify the problem by ignoring pollution from production, because introducing pollution from production in the model makes the model unnecessarily complicated without altering the result in this article. Thus the pollution from the production of market good is not considered in this study.

² See Gronau (1986) for a survey on home production literature.

³ For example, let us think about t market goods such as car or home electronics. In case of these market goods, even though the amount of market good bought is not changed, the more these market goods are used, the more the pollution is emitted.

⁴ In estimating the Euler equations, the restriction for β is needed. In this study, I use β = 0.97.

⁵ For more details, see Hansen and Singleton (1982).

⁶ Pollution also can be used as a proxy variable. However, as different measurement units (BOD or DO) are used across countries, it is hard to use as a proxy variable for pollution.

⁷ It is because at least 100 observations are required for the stability of parameter estimated, when GMM is used as estimation method.

⁸ There are two reasons for adopting only advanced countries. The first is due to data limitation. In case of developing countries, I cannot get sufficient data. The second is due to the assumption that there is a representative agent in the economy. Since the utility function of developing countries is different from that of advanced countries, if developing countries are considered, a representative individual model cannot be used as an analysis tool in this study.

⁹ GMM method involves choosing instrumental variables belonging to the information set. If X_t is defined as

then the vector of instrumental variable is assumed to contain one- and two-period lagged values of X_t .