Regional Air Quality and Happiness in Germany

Abstract

Previous research has analyzed the impact of air pollution on life satisfaction (“happiness”) based on both subjective perceptions of environmental quality and objectively measured pollution data. This article combines these two types of environmental data in life satisfaction regressions and investigates using an instrumental variable (IV)-ordered probit approach whether perceived air quality is endogenous with respect to happiness. We find combining German 2004 socioeconomic panel data with annual readings for sulfur dioxide (SO₂), NO _x , and PM₁₀ by the Umweltbundesamt (UBA; German Environmental Protection Agency) for counties that people bothered by air pollution feel less happy but that simultaneously unhappy people feel more disturbed by air pollution. Controlling for this simultaneity in an IV-ordered probit approach reveals that perceived air pollution does not have a statistically significant effect on life satisfaction anymore. We also find econometric evidence that air pollution is fully capitalized in the housing market.