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Estimating Firms' Demand for Agglomeration

Author

Listed:
  • Hans Koster

    (VU University Amsterdam)

  • Jos N. van Ommeren

    (VU University Amsterdam)

  • Piet Rietveld

    (VU University Amsterdam)

Abstract

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.

Suggested Citation

  • Hans Koster & Jos N. van Ommeren & Piet Rietveld, 2010. "Estimating Firms' Demand for Agglomeration," Tinbergen Institute Discussion Papers 10-087/3, Tinbergen Institute.
  • Handle: RePEc:tin:wpaper:20100087
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    More about this item

    Keywords

    Demand estimation; nonparametric estimation; hedonics; commercial properties;

    JEL classification:

    • C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Semiparametric and Nonparametric Methods: General
    • L1 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance

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