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Agglomeration Externalities and the Dynamics of Firm Location Choices

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  • Holger Sieg

    (University of Pennsylvania)

  • Daniele Coen-Pirani

    (University of Pittsburgh)

  • Jeff Brinkman

    (Carnegie Mellon)

Abstract

We develop a new dynamic general equilibrium model of firm location choice that can explain the observed sorting of firms by productivity and is consistent with the observed entry, exit, and relocation decisions of firms within an urban economy. We discuss existence of equilibrium of and characterize the stationary distribution of firms in each location. The parameters of the model can be estimated using a nested fixed point algorithm. We implement the estimator using data collect by Dunn and Bradstreet for the Pittsburgh metropolitan area. The data suggest that firms located in the city are older and larger than firms located outside the urban core. As a consequence they use more land and labor in the production process. However, they face higher rental rates for land and office space which implies that they operate with a higher employee per land ratio. We find that our model explains these observed features of the data well. Finally, we consider the impact of different relocation policies that provide targeted subsidies to new start-ups and superstar firms.

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Bibliographic Info

Paper provided by Society for Economic Dynamics in its series 2011 Meeting Papers with number 966.

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Date of creation: 2011
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Handle: RePEc:red:sed011:966

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  1. Rosenthal, Stuart S. & Strange, William C., 2001. "The Determinants of Agglomeration," Journal of Urban Economics, Elsevier, vol. 50(2), pages 191-229, September.
  2. Combes, Pierre-Philippe & Duranton, Gilles & Gobillon, Laurent & Puga, Diego & Roux, Sébastien, 2009. "The productivity advantages of large cities: Distinguishing agglomeration from firm selection," CEPR Discussion Papers, C.E.P.R. Discussion Papers 7191, C.E.P.R. Discussion Papers.
  3. Esteban Rossi-Hansberg, 2004. "Optimal Urban Land Use and Zoning," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 7(1), pages 69-106, January.
  4. Hopenhayn, Hugo A, 1992. "Entry, Exit, and Firm Dynamics in Long Run Equilibrium," Econometrica, Econometric Society, Econometric Society, vol. 60(5), pages 1127-50, September.
  5. Krugman, Paul, 1991. "Increasing Returns and Economic Geography," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 99(3), pages 483-99, June.
  6. Ellison, G. & Glaeser, E.L., 1994. "Geographic Concentration in U.S. Manufacturing Industries: A Dartboard Approach," Working papers, Massachusetts Institute of Technology (MIT), Department of Economics 94-27, Massachusetts Institute of Technology (MIT), Department of Economics.
  7. Gilles Duranton & Diego Puga, 2002. "From Sectoral to Functional Urban Specialization," NBER Working Papers 9112, National Bureau of Economic Research, Inc.
  8. Bresnahan, T.F & Reiss, P.C., 1989. "Entry And Competition In Concentrated Markets," Papers, Stanford - Studies in Industry Economics 151, Stanford - Studies in Industry Economics.
  9. J Vernon Henderson & James Davis, 2004. "The Agglomeration of Headquarters," Working Papers, Center for Economic Studies, U.S. Census Bureau 04-02, Center for Economic Studies, U.S. Census Bureau.
  10. Adsera, Alicia, 2000. "Sectoral spillovers and the price of land: a cost analysis," Regional Science and Urban Economics, Elsevier, Elsevier, vol. 30(5), pages 565-585, September.
  11. Guy Dumais & Glenn Ellison & Edward L Glaeser, 1998. "Geographic Concentration as a Dynamic Process," Working Papers, Center for Economic Studies, U.S. Census Bureau 98-3, Center for Economic Studies, U.S. Census Bureau.
  12. Gilles Duranton & Diego Puga, 2001. "Nursery Cities: Urban Diversity, Process Innovation, and the Life Cycle of Products," American Economic Review, American Economic Association, American Economic Association, vol. 91(5), pages 1454-1477, December.
  13. Thomas J. Holmes & John J. Stevens, 2002. "Geographic Concentration and Establishment Scale," The Review of Economics and Statistics, MIT Press, vol. 84(4), pages 682-690, November.
  14. Gallant, A Ronald & Nychka, Douglas W, 1987. "Semi-nonparametric Maximum Likelihood Estimation," Econometrica, Econometric Society, Econometric Society, vol. 55(2), pages 363-90, March.
  15. Hopenhayn, Hugo & Rogerson, Richard, 1993. "Job Turnover and Policy Evaluation: A General Equilibrium Analysis," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 101(5), pages 915-38, October.
  16. Esteban Rossi-Hansberg & Mark L. J. Wright, 2007. "Establishment Size Dynamics in the Aggregate Economy," American Economic Review, American Economic Association, American Economic Association, vol. 97(5), pages 1639-1666, December.
  17. J. Vernon Henderson & Ari Kuncoro & Matthew Turner, 1992. "Industrial Development in Cities," NBER Working Papers 4178, National Bureau of Economic Research, Inc.
  18. Anas, Alex & Kim, Ikki, 1996. "General Equilibrium Models of Polycentric Urban Land Use with Endogenous Congestion and Job Agglomeration," Journal of Urban Economics, Elsevier, vol. 40(2), pages 232-256, September.
  19. Hansen, Lars Peter, 1982. "Large Sample Properties of Generalized Method of Moments Estimators," Econometrica, Econometric Society, Econometric Society, vol. 50(4), pages 1029-54, July.
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