conducted through face-to-face interactions: about 93% of firms sell directly to final consumers (as opposed to wholesale retailers) and 80% of orders are placed directly through walk-ins by customers. Very few firms engage in shipping to customers. As firms sell mostly through faceto-face interactions and do not market their products widely, this suggests that firms lack the means to attract customers to their location. Therefore, by locating on large roads, firms may gain visibility to potential customers driving down the road. The evidence from our survey is thus consistent with the productivity benefits of being located near major roads arising mainly from better access to customers.

# **6.2 Managers Sort to More Polluted (Higher Demand) Locations**

Having established that managers face a trade-off, we study where they locate within the city. We use a version of equation 3 to show that managers sort to more polluted and higher demand locations. The results are shown in Table 5.<sup>38</sup> On the extensive margin, in columns 1 and 2 the dependent variable is a dummy equal to one if the grid cell has at least one firm. We regress this on the median road size in the cell (column 1) and the average residual pollution in the cell (column 2). The results show that cells with larger roads and more polluted grid cells are more likely to have at least one firm.

We find similar results when looking at the intensive margin. Columns 3-4 use as outcome the log of the firm density in the cell, and regress this again on the median road size in the cell and on the average residual pollution in the cell. Both columns show positive and significant estimates. Column 3 shows that an increase in median road size of one unit is associated with an increase in firm density of 13 percent. Column 4 shows that a 1% increase in pollution residual is associated with a 0.3% increase in firm density. In column 7, we show that this result is robust to running the regression at the level of the individual pollution measurement. Note again that in all these specifications we are controlling for sub-county fixed effects and distance from the center of the major city in the region. Therefore, these results show that within the city, firms sort into the more polluted areas with better road access. This pattern can be appreciated visually in Figures 2 and 4, which plot grid cells, roads and firms for one of our sampled sub-counties. The figures clearly show that firms cluster along the major roads, and that these areas are more polluted.

**Managers reveal choosing locations to access customers.** Our survey provides direct evidence that firms choose to locate in the more polluted areas of town as these provide better

> 38Through the lenses of the model, the previous section established that there exists a trade-off between choosing a location with lower pollution or higher productivity. This section shows that managers, both highand low-skilled, tend to sort to locations with relatively higher pollution. Of course, in practice, there is variation in the location that managers choose, as some managers pick the low pollution location due to factors outside our model, such as proximity to their home. This variation allows us to estimate the empirical regressions.

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