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Rocketing rents: The magnitude and attenuation of agglomeration economies using commercial rents and micro-data

  • Hans Koster

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    In this paper I measure the impact of urbanisation and localisation economies on commercial rents (offices and industrial buildings) using unique micro-data on both commercial property transactions, as well as all firm (establishment) locations. I add to the literature in three important ways. First, I use measures of urbanisation and localisation that are continuous over space to overcome the modifiable areal unit problem. More specifically, I estimate kernel employment densities that are continuous over space. Second, to distinguish agglomeration economies from unobserved endowments, I include postcode fixed effects (about the size of a census block) and use temporal variation in densities to measure the impact of urbanisation and localisation economies on commercial property values, assuming that unobserved endowments are time-invariant. To relax the latter assumption I also test robustness by including time-variant endowments (e.g. new station openings, changes in land use) and region-year fixed effects. This is arguably preferable over standard IV approaches using on long-lagged instruments, which may be invalid. Third, I determine the spatial extent of agglomeration economies. Using a cross-validation procedure, the spatial decay parameter is estimated within the model. The results show that urbanisation economies, rather than localisation economies, have a considerable impact on rents: a standard deviation increase in employment density leads to an increase in rents of about 10 percent. This effect is larger in magnitude than estimates of agglomeration economies using wages, suggesting that agglomeration economies mainly capitalise in rents. The geographical extent of these benefits is about 15 kilometres and very robust across different specifications. So, urbanisation economies seem to mainly take place at a city or municipality-level, rather than at a more aggregate level. I furthermore show that the bias of ignoring unobserved endowments seems to be rather small. JEL-code ― R30, R33 Keywords ― commercial buildings; hedonic pricing; agglomeration economies; spatial decay; kernel densities

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    Paper provided by European Regional Science Association in its series ERSA conference papers with number ersa12p892.

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    Date of creation: Oct 2012
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    Handle: RePEc:wiw:wiwrsa:ersa12p892
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    1. Gilles Duranton & Laurent Gobillon & Henry Overman, 2006. "Assessing the Effects of Local Taxation Using Microgeographic Data," CEP Discussion Papers dp0748, Centre for Economic Performance, LSE.
    2. Combes, Pierre-Philippe & Duranton, Gilles & Gobillon, Laurent, 2010. "The Identification of Agglomeration Economies," CEPR Discussion Papers 8119, C.E.P.R. Discussion Papers.
    3. Dekle, Robert & Eaton, Jonathan, 1999. "Agglomeration and Land Rents: Evidence from the Prefectures," Journal of Urban Economics, Elsevier, vol. 46(2), pages 200-214, September.
    4. Andersson, Fredrik & Burgess, Simon & Lane, Julia I., 2007. "Cities, matching and the productivity gains of agglomeration," Journal of Urban Economics, Elsevier, vol. 61(1), pages 112-128, January.
    5. Duranton, Gilles & Henry G Overman, 2003. "Testing for Localisation Using Micro-Geographic Data," Royal Economic Society Annual Conference 2003 69, Royal Economic Society.
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    8. Mohammad Arzaghi & J. Vernon Henderson, 2008. "Networking off Madison Avenue," Review of Economic Studies, Oxford University Press, vol. 75(4), pages 1011-1038.
    9. Patrick Bayer & Christopher Timmins, 2003. "Estimating Equilibrium Models of Sorting across Locations," Working Papers 862, Economic Growth Center, Yale University.
    10. Combes, Pierre-Philippe & Duranton, Gilles & Gobillon, Laurent, 2008. "Spatial wage disparities: Sorting matters!," Journal of Urban Economics, Elsevier, vol. 63(2), pages 723-742, March.
    11. Davis, James C. & Henderson, J. Vernon, 2008. "The agglomeration of headquarters," Regional Science and Urban Economics, Elsevier, vol. 38(5), pages 445-460, September.
    12. Mary Amiti & Lisa Cameron, 2007. "Economic Geography and Wages," The Review of Economics and Statistics, MIT Press, vol. 89(1), pages 15-29, February.
    13. Richard Arnott & Alex Anas & Kenneth Small, 1997. "Urban Spatial Structure," Boston College Working Papers in Economics 388., Boston College Department of Economics.
    14. Glenn Ellison & Edward L. Glaeser & William R. Kerr, 2007. "What Causes Industry Agglomeration? Evidence from Coagglomeration Patterns," Harvard Business School Working Papers 07-064, Harvard Business School.
    15. Glenn Ellison & Edward L. Glaeser, 1994. "Geographic Concentration in U.S. Manufacturing Industries: A Dartboard Approach," NBER Working Papers 4840, National Bureau of Economic Research, Inc.
    16. Ciccone, Antonio, 2002. "Agglomeration effects in Europe," European Economic Review, Elsevier, vol. 46(2), pages 213-227, February.
    17. Matthew P. Drennan & Hugh F. Kelly, 2011. "Measuring urban agglomeration economies with office rents," Journal of Economic Geography, Oxford University Press, vol. 11(3), pages 481-507, May.
    18. Eichholtz, Piet & Kok, Nils & Quigley, John M., 2009. "Doing Well by Doing Good? Green Office Buildings," Berkeley Program on Housing and Urban Policy, Working Paper Series qt507394s4, Berkeley Program on Housing and Urban Policy.
    19. Briant, A. & Combes, P.-P. & Lafourcade, M., 2010. "Dots to boxes: Do the size and shape of spatial units jeopardize economic geography estimations?," Journal of Urban Economics, Elsevier, vol. 67(3), pages 287-302, May.
    20. Gilles Duranton & Vassilis Monastiriotis, 2002. "Mind the Gaps: The Evolution of Regional Earnings Inequalities in the U.K., 1982-1997," Journal of Regional Science, Wiley Blackwell, vol. 42(2), pages 219-256.
    21. Steven Farber & Antonio Páez, 2007. "A systematic investigation of cross-validation in GWR model estimation: empirical analysis and Monte Carlo simulations," Journal of Geographical Systems, Springer, vol. 9(4), pages 371-396, December.
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