Urban Firm Location and Land Use Under Certainty and Under Product-Price and Land-Rent Risk

This paper introduces risk into location and land-use choices of a profit-maximizing urban firm. Although risk has been introduced into the location theories of Von Th�nen, Weber, and Hotelling (Asami and Isard, 1989), it has not to our knowledge been incorporated into a firm�s choice of intraurban location and land use. We address this issue with a simple model of an urban firm, which chooses location (as distance from the CBD) and land input within an urban area. This model has antecedents in Aloa (1974), Moomaw (1980), and Cooke (1983) but is both simpler (in that it includes only one input, land) and more general (in that it assumes general functional forms and profit maximization). We start with choices under certainty, providing comparative static results on location and land use for changes in product price and land rent. We find location and land use directly related to product price and inversely related to land rent. We then turn to choice of location and land use under product-price and land-rent risk. Both product-price and land-rent risk lead the firm to choose less land and a location closer to the CBD than under certainty. The appendix extends the model to a mean-preserving increase in risk.