Firm Presence, Environmental Quality, and Economic Activity: Evidence from Randomized Firm Relocation"

Firm location decisions are one of the most important decisions managers make, optimizing factors such as proximity to customers, suppliers, and useful information. The inherent endogeneity of firm location decisions renders estimating the impact of firm presence difficult. In this paper, we use an environmental relocation policy that randomly moved over 20,000 small firms operating within city limits in New Delhi to industrial areas outside the city over several years. We find that a reduction in firm presence improves measured air quality, but is costly for firms: relocated firms have a high rate of exit, which increases in the distance relocated. The exit effect could have been mitigated by 8-20% of the counterfactual exit rate by allocating firms to plots in the industrial area optimally, rather than the uniform random assignment pursued by the government.