Replication Data for: When Pollution Improves Efficiency: Air Quality and Labor Investment in Firms

Using a sample of nonpolluting listed firms in China from 2009--2020, we document a counterintuitive finding: severe air pollution leads to an improvement in labor investment efficiency. We establish causality via thermal inversions as an instrumental variable. Mechanistically, we show that firms actively increase employee welfare to mitigate labor friction and retention risk. Crucially, we trace the source of this efficiency gain to the alleviation of “under-hiring,” particularly among state-owned and politically connected firms with abundant financial resources. We attribute this pattern to a “substitution pressure”: constrained by environmental mandates on polluters, local governments shift the burden of economic growth onto these nonpolluting firms. Consistent with this view, the effect is amplified in regions with high growth targets and is accompanied by increased corporate tax burdens. Our findings suggest that external government discipline—combined with internal retention incentives—compels firms to abandon conservative labor strategies.