Does Air Pollution Affect Consumption Behavior? Evidence from Korean Retail Sales

Using monthly regional data on air quality and large retail store sales in Korea, we empirically examine the effect of air pollution on retail sales. We account for regional heterogeneity in air pollution and control for various macroeconomic and climatic factors that can affect retail sales. We also use the air quality indicator in the west coastal islands - affected by trans-border pollution, but uncorrelated with the economic activity in the mainland - as an instrumental variable. The estimation results show that, in general, one additional day of PM10 level higher than 80 μg/m3 reduces monthly retail sales by about 0.1 percent. Nonetheless, an adaptive pattern emerges over time, particularly when the level of air pollution in the previous month was severe.