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Agglomeration Externalities and the Dynamics of Firm Location Choices
Any type of content formally published in an academic journal, usually following a peer-review process.
posted on 05.08.2010by Jeffrey Brinkman
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.