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Estimating Firms' Demand for Agglomeration


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  • Hans Koster

    (VU University Amsterdam)

  • Jos N. van Ommeren

    (VU University Amsterdam)

  • Piet Rietveld

    (VU University Amsterdam)


The market for commercial properties is characterised by extreme heterogeneity in demand. In this paper, we aim to gain more insight in the heterogeneity in demand for employment agglomeration and size of the rental property using a two-stage hedonic approach following Bajari and Benkard (2005). We use unique micro-data of properties' attributes as well as of firm characteristics. Given assumptions on the functional form of the production function, we identify firm-specific parameters using a nonparametric control function approach that corrects for endogeneity. The results show that agglomeration benefits are capitalised in rents: a one standard deviation increase in agglomeration leads to an increase in the annual rents of about 6 percent. It is found that larger and business services firms are willing to pay (substantially) more for agglomeration. Furthermore, for office buildings a 10 percent increase in number of employees increases the marginal willingness to pay for floor space with 8 percent, which suggests that internal returns to scale are present.

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Bibliographic Info

Paper provided by Tinbergen Institute in its series Tinbergen Institute Discussion Papers with number 10-087/3.

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Date of creation: 31 Aug 2010
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Handle: RePEc:dgr:uvatin:20100087

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Keywords: Demand estimation; nonparametric estimation; hedonics; commercial properties;

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  1. Dekle, Robert & Eaton, Jonathan, 1999. "Agglomeration and Land Rents: Evidence from the Prefectures," Journal of Urban Economics, Elsevier, vol. 46(2), pages 200-214, September.
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