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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. Duranton, Gilles & Puga, Diego, 2005. "From sectoral to functional urban specialisation," Journal of Urban Economics, Elsevier, vol. 57(2), pages 343-370, March.
  2. Esteban Rossi-Hansberg & Mark L. J. Wright, 2006. "Establishment size dynamics in the aggregate economy," Staff Report 382, Federal Reserve Bank of Minneapolis.
  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.
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  10. Duranton, Gilles & Puga, Diego, 2000. "Nursery Cities: Urban Diversity, Process Innovation, and the Life-Cycle of Products," CEPR Discussion Papers 2376, C.E.P.R. Discussion Papers.
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  14. Bresnahan, Timothy F & Reiss, Peter C, 1991. "Entry and Competition in Concentrated Markets," Journal of Political Economy, University of Chicago Press, vol. 99(5), pages 977-1009, October.
  15. Hopenhayn, Hugo A, 1992. "Entry, Exit, and Firm Dynamics in Long Run Equilibrium," Econometrica, Econometric Society, vol. 60(5), pages 1127-50, September.
  16. 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.
  17. 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.
  18. Gallant, A Ronald & Nychka, Douglas W, 1987. "Semi-nonparametric Maximum Likelihood Estimation," Econometrica, Econometric Society, vol. 55(2), pages 363-90, March.
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