Correcting agglomeration economies: How air pollution matters

This paper aims to correct standard measures of agglomeration economies to account for air pollution. This paper examines the impact of nitrogen oxide (NOX) a pollutant mainly released by transportation on worker productivity. Literature on agglomeration economies highlights the positive role of employment density on productivity, without accounting for the negative impacts of local pollutants. First, standard estimates of agglomeration economies for the 304 French employment areas are in line with the literature. Then, we introduce the variable (NOX) emissions and, once pollution is accounted for, the estimated direct impact of agglomeration externalities on productivity are lower by more than 13 per cent.