Air pollution, cognitive capacity, and borrowing behaviours: evidence from an online peer-to-peer platform

ABSTRACT

Borrowing decisions typically involve processing large amounts of financial information. However, it has been understudied whether cognitive capacity factors such as air pollution affect borrowing behaviours. In this paper, we estimate the causal impact of air pollution on borrowing behaviours by using the universe of borrowing application data on an online peer-to-peer platform and a thermal inversion instrument. We find that a 1% increase in air pollution reduces the number of borrowing applications and the total amount requested by 0.05% and 0.31% respectively. The impact is stronger when the borrowing is for more complex and less necessary purposes, and when we examine the areas with lower educational attainment. The results suggest that the adverse effect of air pollution on cognitive capacity prevents people from borrowing.

KEYWORDS:

• Air pollution
• cognitive capacity
• borrowing behaviour
• peer-to-peer
• thermal inversion

JEL CLASSIFICATION:

• Q53
• G41
• G51

Disclosure statement

No potential conflict of interest was reported by the author(s).

Supplementary material

Supplemental data for this article can be accessed online at https://doi.org/10.1080/13504851.2022.2130137

Notes

¹ See Arceo, Hanna, and Oliva (2016), He, Liu, and Salvo (2019), Jans, Johansson, and Nilsson (2018), and Sager (2019) for examples.

² Because the measures of borrowing behaviours and air pollution may be zero, we add one to the variables before taking the log.

³ The first-stage F statistics of 93.42 shows that we have a relevant instrument.

⁴ In comparison, OLS estimation (columns 1 and 3) is biased upward, suggesting the existence of confounding variables. For example, it is possible that positive demand shocks correlate with more manufacturing activities and air pollutant emissions, and more borrowing needs at the same time.

⁵ Interestingly, air pollution reduces borrowing for home improvement but not that for house purchases. The results are also consistent with our hypothesized mechanism of cognitive capacity. This is because home improvement is less necessary and shorter-planned than house purchases, and when people’s cognitive capacity are limited, they tend to reallocate brain processing power from less necessary and shorter-planned things to other things.

Additional information

Funding

The author(s) reported there is no funding associated with the work featured in this article.