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Estimating a dynamic equilibrium model of firm location choices in an urban economy

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  • Jeffrey Brinkman
  • Daniele Coen-Pirani
  • Holger Sieg

Abstract

We develop a new dynamic general equilibrium model to explain firm entry, exit, and relocation decisions in an urban economy with multiple locations and agglomeration externalities. We characterize the stationary distribution of firms that arises in equilibrium. We estimate the parameters of the model using a method of moments estimator. Using unique panel data collected by Dun and Bradstreet, we find that our model fits the moments used in estimation as well as a set of moments that we use for model validation. Agglomeration externalities increase the productivity of firms by about 8 percent. Economic policies that subsidize firm relocations to the central business district increase agglomeration externalities in that area. They also increase economic welfare in the urban economy.

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Paper provided by Federal Reserve Bank of Philadelphia in its series Working Papers with number 12-26.

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Date of creation: 2012
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Handle: RePEc:fip:fedpwp:12-26
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Keywords: Externalities (Economics) ; Urban economics ; Equilibrium (Economics) ; Estimation theory;

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