# Urban Economics Association

## 2nd Meeting of the Urban Economics Association

54th Annual North American Meetings of the Regional Science Association International (RSAI)
November 8-11, 2007
Savannah, Georgia, USA

Program Committee:

### Accepted Papers

Session A01. Land Use Models

Courtney LaFountain* (University of Texas at Arlington)

Core Equivalence for Residential Land Use Models

I demonstrate that in the monocentric city model, an allocation is in the core if and only if it is an equilibrium allocation, as long as households are endowed with strictly positive quantities of a composite consumption good, enjoy any net trade bundle at least as much as they enjoy one on the boundary of their choice set, have monotonic preferences, have preferences and endowments that are not too different, and as long as there is land at every location. Since equilibria exist in these circumstances, the core is not empty.

Alex Anas* (State University of New York at Buffalo), David Pines (Tel-Aviv University)

Efficient Urban Sprawl and Alternative Public Finance Policies in a System of Replicable Cities

We study a system of replicable (identical) cities with un-priced traffic congestion where each city requires a minimum investment in infrastructure setup costs. We consider alternative planning regimes (or, equivalently, market with profit-maximizing developers), differing from each other according to the public policy for financing the infrastructure. These policies play two roles: 1) providing the revenues that defray the costs of city setup; 2) internalizing the congestion externality. The tax menu considered in the paper includes differential land rent tax, congestion toll, head tax, and suburban land tax. The first-best policy consists of a confiscatory tax on differential land rent (a Henry George tax), together with a toll on traffic congestion. When tolling is infeasible there are two resource allocation distortions. In the intensive margin, too many workers-residents live in the suburbs; while in the extensive margin, the number of cities is too few. In that case the two remaining taxes, the head tax and suburban land tax, should together supplement the Henry George tax. If, in addition to tolling, one of these two taxes is also infeasible, the other should supplement the Henry George tax. We rank the policies according to efficiency, economic sprawl (total travel cost) and geographic sprawl (aggregate land used). We derive sufficient conditions for the efficiency of a regime to be negatively correlated with economic sprawl but positively correlated with geographic sprawl, so that efficient policies, including the urban growth boundary (equivalent to a suburban land tax), induce more land use on aggregate as they reduce congestion by spreading the population among a larger number of smaller cities.

Yves Zenou* (Stockholm University)

Search, Migration, and Urban Land Use. Theory and Policy Issues

We develop a search-matching model with rural-urban migration and an explicit land market. Wages, job creation, urban housing prices are endogenous and we characterize the steady-equilibrium with migration. We consider an unemployment benefit as well as a transport policy financed by a tax on firms' profits. We show that a decrease in unemployment benefit increases urban employment by discouraging migration but a transportation policy has much drastic effects. It is because a decrease in commuting cost has both a direct negative effect on land rents, which encourages migrants to move to the city, and a direct negative effect on urban wages, which reduces job creation and thus migration. Because of the interaction between the land and the labor markets, these two effects combined with search frictions lead to stark positive effects on urban employment. Thus, improving the transport infrastructure in cities can have important positive effects on urban employment despite the induced migration from rural areas.

Marcus Berliant (Washington University in St. Louis), Tarun Sabarwal* (Washington University in St. Louis)

When Worlds Collide: Different Comparative Static Predictions of Continuous and Discrete Agent Models with Land

This paper presents a difference in the comparative statics of general equilibrium models with land when there are finitely many agents and when there is a continuum of agents. Restricting attention to quasi-linear and Cobb-Douglas utility, it is shown that with finitely many agents, an increase in the (marginal) commuting cost increases land rent per unit (that is, land rent averaged over the consumer's equilibrium parcel) paid by each consumer. In contrast, with a continuum of agents, average land rent goes up close to the central business district, is constant at some intermediate distance, and decreases for consumers farther away. Therefore, there is a qualitative difference between the two types of models, and this difference is potentially testable.

Session A02. Land Supply

Albert Solé-Ollé* (University of Barcelona), Elisabet Viladecans-Marsal (University of Barcelona)

Economic and urban determinants of urban expansion: exploring the local connection

We examine the economic and political determinants of the decision taken by local governments regarding the amount of new land allowed to be deve-loped. The analysis uses a huge database including more than 2,000 Spanish municipalities during the 1999-2003 term-of-office. The increase in develo-pable land in 1999-2003 is explained using a wide set of variables picking up the traits of each municipality in 1999. The variables have been selected after reviewing the recommendations of the literature on urban growth con-trols and taking also into account causes that should be considered specific to Spain. The results show that urban expansion is influenced by a variety of factors. For example, the communities expanding more: (i) are rich, (ii) have more new housing buyers, (iii) are in a weak financial position, (iv) are con-trolled by right parties, (iv) have a low electoral turnout and a local go-vernment that do not face serious electoral competition, and (v) have more land but a lower proportion of environmentally valuable land.

Wouter Vermeulen* (CPB Netherlands Bureau for Economic Policy Analysis), Jan Rouwendal (Free University Amsterdam)

Growth controls, satellites and intercity commuting: an applied general equilibrium analysis

Restrictions on urban development that diversify population growth to nearby residential areas, while fostering intercity commuting, may be beneficial if a negative externality of city size exists. Such considerations appear to have motivated spatial planning in various countries, such as the Netherlands. This paper considers welfare effects of growth controls in a system of two cities that differ in exogenous amenability and in labour market conditions, due to economies of agglomeration. We develop a general equilibrium model, which is applied to the Dutch capital of Amsterdam and the nearby satellite town of Almere. The calibrated model is used to estimate welfare effects of restricting residential development in Amsterdam.

Frederic Robert-Nicoud* (LSE), Christian Hilber (LSE)

Homeownership and land use control: A dynamic model with voting and lobbying

Homeowners have incentives to control and limit local land development and anecdotic evidence suggests that homevoters indeed actively support restrictive measures. Yet, US metro area level homeownership rates are strongly negatively related to corresponding measures of the restrictiveness of land use regulation. To shed light on these seemingly contradictory stylized facts, we present a dynamic model with a planning board that maximizes a weighted social welfare function (SWF). The SWF can be interpreted as the reduced form of various political economy models of voting and lobbying. We consider three special cases: a median voter model, a probabilistic voting model, and an &quot;influence for sale&quot; model. In all three cases conditions exist that predict outcomes which are consistent with the presented stylized facts. Generally, our model predicts that the homeownership rate has an ambiguous effect on the regulatory restrictiveness.

hongbin Cai (guanghua school of management, beijing Unviersity), Vernon Henderson (Department of Economics, Brown university), Qinghua Zhang* (Guanghua school of management, Beijing University)

Land Market in China: 2001--2006

This paper studies the land market in China over the period 2001—2006. The land market has been developing rapidly in recent years in China. What is transferred in the market is actually the leasehold of the use right. Land is sold through three types of auction in China. Using transaction level data, this paper examines: 1) how does the Chinese land bureau select the type of auction for each transaction; 2) what are the determinants of land price. After controlling for the selection effect, we find significant treatment effects on the land price for different types of auction.

Session A03. Amenities and Quality of Life

Amenities as TFP and the Factor of Four

Data from the NIPA and from the Decennial Census of Housing show that the household expenditure share on housing is remarkably constant over time and across metropolitan areas, despite sizeable changes to real rental prices and variation in income. Consistent with this fact, we consider a basic frictionless model in which identical households have Cobb-Douglas preferences for consumption and housing. Households choose an MSA in which to live, and MSAs differ in the income residents receive and in amenities. Equilibrium in the model satisfies the following properties: (1) MSA-level per-capita income and rental prices increase at the same rate only when per-capita housing is held constant; (2) per-capita housing will not be constant when per-capita incomes increase at different rates across MSAs; (3) this income dispersion leads to disproportionate rent dispersion, that is, given our estimate of the expenditure share on housing of 0.25, and holding amenities constant, the difference in log rental prices of two MSAs must equal 4 times the difference in log per-capita income; (4) the difference in log rental prices in any two MSAs is independent of the local housing supply in either MSA. The model provides an exact methodology to quantify changes to the MSA-level total stock of housing and MSA-level amenities, much in the same way that neoclassical growth theory provides a framework to identify changes to TFP given estimates of capital and labor inputs. We find that in the past 24 years, the per-capita and total stock of housing has increased in almost every MSA we consider, and changes to per-capita income and amenities have been nearly perfectly negatively correlated across MSAs. The model raises issues with regard to existing studies of the relationship of house prices, income, and local amenities.

C. P. Barrington-Leigh* (University of British Columbia.), John F. Helliwell (University of British Columbia.)

Empathy and emulation: life satisfaction and the urban geography of comparison groups

Departures from self-centred, consumption-oriented decision making are increasingly common in economic theory and are well motivated by a wide range of behavioural data from experiments, surveys, and econometric inference. A number of studies have shown large negative externalities in individual subjective well-being due to neighbours' incomes. These reflect the role of nearby households as comparison groups acting in individuals' reference-dependent preferences over income or consumption. At the same time, there are many reasons to expect positive spillovers from having prosperous neighbours. We combine high-resolution geographic data from three Canada-wide social surveys and the 2001 census to disentangle the spatial pattern of reference groups in urban areas and to identify channels of positive and negative spillovers on life satisfaction. We discuss implications of these results for regional and macroeconomic policy considerations.

Jordan Rappaport* (Federal Reserve Bank of Kansas City)

Moving to High Qualilty of Life

The U.S. population has been migrating to places with high perceived quality of life. A calibrated general-equilibrium model shows that such migration follows from broad-based technological progress. Rising national wages increase demand for consumption amenities. Under a baseline parameterization, a place with amenities for which individuals would pay 5 percent of their income grows 0.3 percent faster than an otherwise identical place. Productivity is shown to be a decreasingly important determinant of local population. The faster growth of high-amenity places is considerably strengthened if they have low initial equilibrium population density underpinned by low relative productivity. Places with identical amenities asymptotically converge to an identical population density, regardless of their relative productivity levels. An implication is that the high growth rates of high-amenity localities should eventually taper off.

Laurent Gobillon* (Institut National d'Etudes Démographiques (INED)), Carine Milcent (PSE (CNRS-EHESS-ENPC-ENS))

Regional disparities in mortality by heart attack: evidence from France

In this paper, we study the regional disparities in the mortality of patients treated in a hospital for a heart attack. The di¤erence in mortality between the extreme regions reaches 80%. We assess to what extent these disparities are related to regional di¤erences in the local composition of patients, local composition of hospitals and type of hospital care. We use a Cox duration model stratified by hospital. This model captures di¤erences in hospital behaviours in treating the patients during their stay and controls for individual observed heterogeneity. Resultats are re-aggregated at the regional level and show that the mortality between the extreme regions is still 47% after controlling for the individual observed heterogeneity. Interestingly, the extent to which patients are treated with innovative procedures at the regional level plays an important role in the decrease in the disparities. Remaining regional disparities are strongly related to the average hospital size at the regional level. Geographic variables such as the local specialization in for-profit, not-for-profit and public hospitals, as well as the local healthcare structure, also play a significant role.

Session A04. Transportation

Jan Brueckner* (University of California, Irvine), Kurt Van Dender (University of California, Irvine)

Atomistic Congestion Tolls at Concentrated Airports? Seeking a Unified View in the Internalization Debate

The goal of this paper is to bring some unity to the theoretical side of the debate on internalization of airport congestion by deriving all the literature's theoretical results within one simple and unified framework. The analysis starts by replicating the results of Brueckner (2002), who showed that, because airlines behaving in Cournot fashion internalize congestion, they should be charged low congestion tolls. The analysis then validates the findings of Daniel (1995), who argued that larger atomistic tolls are required in a model where a Stackelberg leader interacts with competitive fringe airlines.

Ian Parry* (Resources for the Future), Ken Small (UC Irvine)

Should Urban Transit Subsidies Be Reduced?

This paper derives intuitive and empirically useful formulas for the optimal pricing of passenger transit and for the welfare effects of adjusting current fare subsidies, for peak and off-peak urban rail and bus systems. The formulas are implemented based on a detailed estimation of parameter values for the metropolitan areas of Washington (D.C.), Los Angeles, and London. Our analysis accounts for congestion, pollution, and accident externalities from automobiles and from transit vehicles; scale economies in transit supply; costs of accessing and waiting for transit service as well as service crowding costs; and agency adjustment of transit frequency, vehicle size, and route network to induced changes in demand for passenger miles. The results support the efficiency case for the large fare subsidies currently applying across mode, period, and city. In almost all cases, fare subsidies of 50% or more of operating costs are welfare improving at the margin, and this finding is robust to alternative assumptions and parameters.

Jose Garcia-Montalvo* (UNIVERSITAT POMPEU FABRA), Teresa Garcia-Mila (UNIVERSITAT POMPEU FABRA)

The impact of new highways on business location: New evidence from Spain

The evaluation of the impact of public infrastructures is a very important exercise, given that the size of the budget for public works is quite large in all the levels of government. In this paper we present a new methodology to measure the impact of the transformation of national roads into highways with an application to the Spanish case. During the period 1980 to 2000 there was a very active process of transformation of national roads into highways/dual carriageways in Spain. We analyzed the attraction of firms to the transformed roads by dividing the Spanish roads system into 20-km long segments and locating, using their GIS coordinates, each new firm in the catchment area of one of these segments. Once we obtain the number of new firms in each segment we use several matching estimators to compare the number of new firms per squared kilometer in the transformed and untransformed segments. The results show an increase in the number of firms located in the transformed segments that is not statistically significant. Therefore, the transformation of national roads into high capacity roads (highways or dual carriageways) did not have an additional attraction effect of firms with respect to the segments that were not transformed.

Matthew Turner* (University of Toronto), Gilles Duranto (University of Toronto)

Urban Growth and Transportation

Using an early plan of the \textsc{us} interstate highway system and map of the \textsc{us} railroad network c1898 to instrument for the 1980 road network, we find that a 10% increase in a city's stock of roads causes about a 2% increase in its population and employment and a small decrease in its poverty rate over 20 years. We also find that a 10% increase in a city's stock of large buses causes about a 0.7% population increase and a small increase in the poverty rate over 20 years. We find no evidence that changes in transportation infrastructure affect the composition of industrial activity in a city. Finally, we find that an additional 1km of major roadway allocated to a city at random is associated with a larger increase in population or employment than is a road assigned to a city by the prevailing political process. This is consistent with other evidence that local infrastructure spending rises when economic shocks serve to depress local wages an land prices. This suggests that road construction may be a substitute for social assistance and that roads are built where land and labor are cheap rather than in the places where they are most needed.

Session A05. Employment Centers

Seryoung Park (University of Illinois), Geoffrey Hewings* (University of Illinois)

Aging and the Regional Economy: Simulation Results from the Chicago CGE Model

This paper is structured as follows. In the first section, attention will be directed to a discussion of the link between demographic changes and their economic impacts, with some empirical analysis derived from the Chicago economy. Thereafter, a review of the received theory and some prior empirical work that has explored formal demographic-economic interactions will be provided. The model is presented next and then the results focus on graphical presentation of the results of two scenarios, one in which no aging process is assumed and the other in which the expected pattern of aging is modeled. The analysis is centered on a two-region CGE model of the Chicago economy (Chicago and the Rest of the US) although the results in this paper ignore the influence of migration. The simulations focused on a regional economy that changed little in terms of the age structure (baseline scenario) in contrast to a more realistic case in which the proportion of the population greater than 65 would increase rather significantly, following expected developments for the US economy. The outcomes reveal some important characteristics of the aging process, producing some expected and some surprising results. Subsequent work has added the impacts of migration and the effects of social security funding on welfare levels in the Chicago region.

Christian Redfearn* (University of Southern California), Genevieve Giuliano (University of Southern California)

Employment Center Hierarchy \& Function: The Manifestation of Agglomeration Economies in the Los Angeles Metropolitan Area

Much has been written in recent years on the nature of agglomeration, the umbrella term for the benefits that accrue to firms by virtue of their proximity to one another. Because these economies work through a number of mechanisms it might be expected that the forces for clustering should vary by industry depending on their respective production functions. This paper examines the manifestation of these economies by looking to the spatial distribution of employment within the five-county Los Angeles metropolitan area. We find strong evidence of both localization and urbanization agglomerative economies – but economies that vary sharply by industry. These asymmetric forces for clustering appear to have resulted in a distinct hierarchy of centers that echoes the system of cities in the larger economy.

Wen-Tai Hsu* (University of Minnesota, Twin Cities)

Heterogeneous Fixed Cost, Central Place Hierarchy, and Zipf's Law

This paper provides a model that generates central place hierarchy of cities, from both a subgame perfect equilibrium in a spatial competition model and the socially optimal solution. The main force that drives the differentiation of tasks among different levels of cities is the heterogeneity of fixed costs across products. From the hierarchy of cities, Zipf's law is approximated for the size distributions of both firms and cities when more complex goods need increasingly more fixed costs. The welfare bias between spatial competition equilibrium and the social planner's solution is studied.

Amaya Vega* (University College Dublin), Aisling Reynolds-Feighan (University College Dublin)

Residential Location and Travel-to-Work Mode Choices under Central and Suburban Employment Destination Patterns

Session A06. Local Taxation and Public Goods

Lynne Pepall* (Tufts University), Dan Richards (Tufts University), John Straub (Tufts University), Michael DeBartolo (Cambridge Associates)

Competition, Concentration and Civic Engagement in the Religious Marketplace

We develop a model of spatial competition to explain the high level of spending on social services that distinguishes American churches or faith-based organizations (FBOs). The model predicts that such spending, measured on a per member basis, rises as the equilibrium structure of the religious marketplace becomes more competitive. A simple test of the model using measures of a religious Herfindahl Index constructed by county and by year for panel data covering the years 1994 and 2000 confirms our analysis. As local FBO monopoly power grows, FBO spending on civic activities declines.

Eric Brunner (Quinnipiac University), Stephen L. Ross* (University of Connecticut)

HOW DECISIVE IS THE DECISIVE VOTER?

This paper provides a direct test of the political economy “as if” proposition that underlies nearly all empirical studies that utilize the median voter model. Specifically, we employ a unique dataset to examine whether the voter with the median income is decisive in local spending referenda. Previous tests of the median voter model have typically relied on aggregate cross sectional data to examine whether the voter with the median income is pivotal. These studies are likely biased because communities differ across a variety of unobservable dimensions that are likely correlated with the distribution of income in each community. In contrast to previous studies we make use of a pair of California referendums to estimate a first difference specification that controls for jurisdiction unobservables. The first referendum proposed to lower the required vote share for passing local educational bonding initiatives from 67 to 50 percent, and the second referendum, which was held only six months later, proposed lowering the vote requirement from 67 to 55 percent. This pair of votes allows us to precisely test whether the income and tax price of the decisive voter affects the willingness of voters to support the referendum. Our empirical results suggest that jurisdiction median income accurately captures the expected outcomes of majority votes on public service spending and that voters understand the impact of small changes in the identity of the decisive voter.

Erik Johnson* (University of Colorado - Boulder), Randall Walsh (University of Colorado - Boulder)

The Effect of Property Taxation on Household Mobility - Evidence from the Michigan Vacation Home Market

Owners of vacation homes pay property taxes to the locality where their second home is located, but consume far fewer of the services that these taxes provide than do the residents of the locality. For local residents, the presence of these second homes in the tax base effectively lowers the effective tax price of providing local public services. If the vacation home base is sensitive to changes in its property tax rates and insensitive to the public goods provided by these taxes, tax capitalization and/or out-migration will result. This paper uses a natural experiment in the form of Proposition A, which reformed school property taxes in Michigan at the state level, in order to explicitly test for moblity arising from an exogenous change in property tax rates on the vacation home base. This natural experiment is attractive since it is tax revenues are used in funding local schools, a public good which vacation home owners are indifferent towards. Therefore, the pure tax effect on mobility can be measured. Results indicate that rural areas with an elastic housing supply exhibit an inverse relationship between tax changes and changes in vacation home density.

Teemu Lyytikäinen* (Government Institute for Economic Research (VATT))

The Effect of Three-Rate Property Taxation on Housing Construction

This paper examines the effect on housing construction of taxing undeveloped residential land at a higher rate than developed land. In 2001, Finnish municipalities were allowed to levy an extra property tax on undeveloped land zoned for housing. The aim of the reform was to encourage housing construction. As of 2007, almost 30 percent of municipalities had implemented the new three-rate tax system with different tax rates on land pre development, land post development and buildings. The remaining municipalities have a two-rate system with a uniform land tax and a building tax. A theoretical model of decisions by landowners under the Finnish-type three-rate system suggests that pre-development land tax ought to lead to faster development, but also the density of development may be affected. Our empirical results suggest that adopting the three-rate property tax system increased single-family housing starts annually by roughly 10 percent on average. The size of new single-family units is not affected. The effect of three-rate taxation on all housing starts seems to be weaker than on single family starts.

Session A07. Neighbourhood Choice

Paul Cheshire* (London School of Economics)

Neighbourhood effects, economic dynamics & mixing communities: a critical analysis

The belief that it is fairer if communities are ‘mixed’ can be traced at least to the late 19th Century and the founders of the Garden City Movement. The idea is now firmly established in OECD and national policy. This paper reviews the evidence and argues that this is essentially a belief-based policy since there is scant real evidence that making communities more mixed makes the life chances of the poor any better. There is overwhelming evidence that the attributes which make neighbourhoods attractive are capitalised into house prices/rents. The result is that poor people cannot afford to buy into nicer neighbourhoods which anyway have amenities of no value to them. Mo0reover ‘specialised neighbourhoods are an important element in agglomeration economies and seem to be welfare enhancing. Thus policies for mixed neighbourhoods treat the symptoms rather than the causes of poverty. Efforts to improve social equity would be more effectively directed towards people themselves rather than moving people around to mix neighbourhoods.

Arthur O'Sullivan* (Lewis & Clark College)

Schelling's Model Revisited: Residential Sorting with Competitive Bidding for Land

Schelling’s Model Revisited: Residential Sorting with Competitive Bidding for Land Arthur O’Sullivan Lewis & Clark College Portland Oregon This paper extends the Schelling model of residential sorting in a number of ways. Rather than bilateral trade (lot swapping by dissatisfied residents), each lot is allocated to the highest bidder among two or three household types. Aggregate land rent provides a measure of social welfare under different allocations. In the Schelling model and its descendents, household preferences for the residential mix are expressed in terms of tolerance—the maximum number of neighbors of a different type that will be tolerated--and once the tolerance threshold is exceeded, a household moves to a different neighborhood. In contrast, this paper considers a variety of utility and bidding functions, including the following. • Pure segregation: A household’s bid for a lot is increasing in the number of neighbors of the same type. • Common attraction to single type: For all types, a household’s bid for a lot is increasing in the number of neighbors of a single type, e.g., high income or favorable school peers. • Heterogeneous integration: A household’s bid for a lot reaches its maximum with a mixed neighborhood, with the peak mixture varying across household types. I will use the model to explore the welfare implications of polices that affect household sorting and mixing, including zoning and tax/subsidy schemes. I will also use the model to explore the dynamics of gentrification. The model will be solved numerically, with a JAVA user interface that shows the dynamics of residential sorting and mixing under different assumptions about household preferences, citywide household mixes, and public policies. The application will be available on the web for later use by instructors and students.

Nathaniel Baum-Snow* (Brown University)

School Desegregation, School Choice and Urban Population Decentralization

Population decentralization within urban areas has been a stark feature of the landscape in the United States since World War Two. Between 1960 and 2000, the aggregate fraction of large metropolitan area populations living in central cities declined from 0.42 to 0.30. Further examination of the data reveals huge racial disparities in patterns of urban population decentralization. While the aggregate non-black population in central cities grew by only 1 percent between 1960 and 2000, the aggregate central city black population grew by 65 percent over this period. The differences in these aggregate trends are almost entirely driven by the fact that whites left central cities at much higher rates than blacks prior to 1980 and that this period saw considerable net migration of blacks from rural areas to cities. In particular, between 1960 and 1980 aggregate central city non-black population declined by 9 percent while the black population grew by 48 percent. However, between 1980 and 2000, non-black central city population grew by 11 percent while black central city population grew by 12 percent, only slightly faster. In this paper, I examine the role of central city school desegregation in determining patterns of urban population decentralization by race. I formulate a model of residential location choice within a metropolitan area that incorporates endogenous public school quality in the central city and suburban jurisdictions and the opportunity for households to choose private schools for their child. The model highlights the importance of investigating the choices of public or private schools and residential location as joint decisions. I empirically evaluate the responses of public and private school enrollment and location choices by race as a result of public school desegregation orders using census tract data over time and data from Welch & Light (1987) and Logan (forthcoming) on central city school desegregation orders. Preliminary results exhibit evidence of a relationship between school desegregation and patterns in urban population decentralization.

Yannis M. Ioannides* (Tufts University), Giulio Zanella (University of Siena)

Searching for the Best Neighborhood: Mobility and Social Interactions

The paper examines what influences households when they change their residence, giving special emphasis on the possible role of social interactions and cultural transmission. Parents' concerns about the effects of social interactions, within neighborhoods and schools, on their children's human capital acquisition and their acculturation give rise to preferences over attributes of neighborhoods. Households searching for the\emph{ best } neighborhood consider demographic and social attributes of neighborhoods in addition to conditions of housing and labor markets. They move when they find it. We have merged, using geocodes, micro data from the PSID with data at the level of census tracts from the 2000 US Census to construct a rich data set that contains detailed information on households and contextual information on attributes of the neighborhoods where households reside in two successive periods as well as surrounding neighborhoods. Our estimation results include, in particular, the following: One, households are more likely to move out of neighborhoods whose characteristics are commonly perceived as not being conducive to acquisition of human capital by their children nor to transmission of parental cultural traits; they are likely to move into neighborhoods that exhibit desirable characteristics. Two, while this is the case for families with children, it is not for families without children.

Session A08. Housing Discrimination

Vernon Henderson* (brown university)

Exclusion through informal sector housing development

see "paper"

Ying Pan* (Brown University)

Gains from Green Cards： Immigrant Parents’ Legal Status and Children’s Scholastic Achievements

Over three million U.S. citizen children live in families of illegal immigrant household heads or spouses. Despite the large number of these children, little is known about how the well-being of these children is affected by their parents’ shadowed life. This paper addresses this question by investigating the impact that the legal status of Latino immigrant women has on their children’s scholastic achievements. To properly estimate the effect of legal status, two empirical problems need to be overcome: 1) the potential joint determination of mothers’ immigration status and children’s scholastic performance; and 2) the existence of misreporting in legal status among illegal immigrants. The first problem biases the OLS estimator and the second problem biases both the OLS estimator and the conventional IV estimator. I resolve the omitted variable bias by exploiting the biggest amnesty program in the U.S. history (IRCA 1986) as the source of exogenous variation in likelihood of having legal status. Moreover, based on the literature in estimation with misclassification, I use a two-step semi-parametric method, which allows me to estimate the misreporting rate as well as recover the true treatment effect that is purged of both misreporting and omitted variable bias. My empirical analysis using the data of the Los Angeles Family and Neighborhood Survey finds that around 13% of sampled Latino immigrant women who claim to be legal immigrants are actually illegal. When the misreporting in legal status is taken into account, estimation indicates that had the Latino illegal immigrant women been granted legal status, their children on average would have improved the math scores by .67 standard deviation and improved the reading scores by .53 standard deviation. This paper also discusses the mechanisms through which immigrant parents’ legal status affects children’s scholastic performance.

Fernando Ferreira (University of Pennsylvania), Albert Saiz* (University of Pennsylvania)

The Importance of Being “Ernesto”: Measuring Preferences for Hispanic Neighborhoods

Does “decentralized racism” against Hispanics operate in residential location decisions? Hispanics have recently become the largest minority group in the United States, yet we do not know much about preferences for residential segregation with respect to this group. We use a data set with information on all housing transactions in the San Francisco Bay Area since 1988 to identify the arrival of individuals with a Hispanic surname into a house. We investigate if neighborhoods that transition toward a greater Hispanic share are also becoming relatively less desirable to the marginal buyer, as measured by sales prices. Our research design allows us to control for neighborhood trends, neighborhood fixed effects, a set of detailed housing characteristics and the unobserved features of the house that are correlated with the race of the previous owner. Even when controlling for the share of Hispanics in a broader neighborhood, we find that the arrival of a new Hispanic homebuyer is associated with significant price declines in close neighbor houses.

Peter Zorn* (Freddie Mac), Marsha Courchane (CRA International)

The Pricing of Home Mortgage Loans to Minority Borrowers: How Much of the APR Differential Can We Explain?

The releases of the 2004 and 2005 HMDA data have engendered a lively debate over implications regarding the treatment of minority mortgage borrowers. Our access to proprietary lender data allows us to conduct a uniquely comprehensive analysis of this issue. Our data show that minority borrowers pay substantially higher annual percentage rates (“APRs”) than do non-minority borrowers. We assess the extent to which these differentials are attributable to observable characteristics by estimating an endogenous switching regression model of the probability of taking out a subprime mortgage, and APR conditional on getting either a subprime or prime mortgage. We find that more than 90 percent of the African American APR gap, and more than 85 percent of the Hispanic APR gap, is due to observable differences in underwriting, costing and market dynamic factors that appropriately explain mortgage pricing differentials. This leaves little, if any, of the aggregate differences in APR paid by minority and non-minority borrowers that can be appropriately attributed to the differential treatment of borrowers. Our analysis suggests that the primary focus of public policies aimed at remediating APR differentials should be the elimination of race/ethnicity differentials in FICO scores, income, wealth and, arguably, financial literacy. Our data also strongly support the use of an endogenous switching regression framework. As a practical matter, however, data limitations likely will limit the applicability of this approach in regulatory reviews of lenders. Moreover, our results suggest that explicitly accounting for correlation in the error terms will generally have only a relatively small impact on the assessment of APR differentials between minority and non-minority borrowers.

Session A09. Real Estate

Edward Coulson* (Penn State University), Daniel McMillen (University of Illinois, Chicago)

Estimating Time, Age and Vintage Effects in Housing Prices

The simultaneous estimation of vintage, age and time of sale effects in hedonic models is generally thought to be impossible without some restriction on functional form. This is not the case. We extend and employ the method of McKenzie (2006) to estimate nearly completely unrestricted nonparametric hedonic effects of these three temporal variables for a large sample of transactions from Chicago. We compare these to standard treatments of these three variables in hedonic models, and also test for the restrictions that would be implied by linear and quadratic temporal effects, which are all strongly rejected.

Min Hwang (George Washington University), John Quigley* (University of California, Berkeley)

Hous price Dynamics in Time and Space: Market Liquidity and Investor Returns

It is widely accepted that aggregate housing prices are predictable, but that excess returns to investors are precluded by the transaction costs of buying and selling property. We reexamine this issue, modeling directly the price discovery process for individual dwellings. The empirical results clearly reject random walks, supporting mean reversion in housing prices and diffusion of innovations over space. Moreover, when aggregate returns are computed from models that erroneously assume a random walk and spatial independence, we find that they are strongly autocorrelated. However, when they are calculated from the appropriate model, predictability in investment returns is completely absent. We conduct extensive simulations, over different time horizons and with different investment rules, testing whether better information on housing price dynamics leads to increased investor returns. We establish that the illiquid nature of the housing market precludes realization of trading gains based on knowledge of market dynamics.

Donald Haurin* (Ohio State University)

Is it a Good Time to Buy a House?

Michael Eriksen* (Syracuse University)

Neighborhoods, Risk, and the Value of Low Income Housing Tax Credits

In the mid-1980s the federal government created the Low-Income Housing Tax Credit (LIHTC) program to subsidize the construction of rental housing for low-income households. Since then, the program has ballooned into the largest supply-side program in the nation’s history with additional calls to double the size of the program. A key feature of the program is that virtually all LIHTC projects, bundled with the tax credits, are sold on a secondary market immediately after construction. This paper explores why this secondary market is so active and the market price of a tax credit. Absent risk, one dollar of tax credit should sell for one dollar in a competitive market after taking the annuity structure of the LIHTC program into account. However, results indicate that one dollar of tax credit trades for $0.74, on average, across a project-level sample of transactions in California. This suggests that LIHTC investors are exposed to substantial risk. In part, that risk likely varies with neighborhood attributes that affect the possibility that a developer would fail to adhere to programmatic rent ceilings and tenant income limits. Violation of these restrictions results in a substantial financial penalty imposed on investors. Further empirical analysis confirms that neighborhood risk factors and project-specific features help to account for why tax credits are valued below one dollar. These results have important implications for siting of LIHTC projects and future policy decisions. Session A10. Housing Joe Gyourko* (University of Pennsylvania), Edward Glaeser (Harvard University) Housing Dynamice We calibrate a dynamic model of housing in the spatial equilibrium tradition of Rosen and Roback to see whether such a model can fit the key empirical moments of the housing market such as the volatility and serial correlation of price changes and new construction. With reasonable parameter values, the model generates the empirically observed mean reversion of prices over five year periods, but cannot explain the observed positive serial correlation at higher frequencies. The model predicts the positive serial correlation of new construction that we see in the data and the volatility of both prices and quantities in the typical market. Plausible heterogeneity in construction cost parameters can readily account for the substantial variation in construction intensity across markets. However, the model cannot explain the price change volatility in the most expensive markets. Anne Laferrère* (INSEE and CREST) The richer the more mobile, except for Parisian public housing tenants This article looks into the determinants of residential mobility, and especially at the effect of income. Mobility is measured through its corollary, the length of tenure in the current home. We find that more income reduces the length of tenure at all ages. The income gradient is steeper at lower level of income, which points to income constraints to residential mobility for the poorest households. One exception to the rule is found for the Parisian tenants living in public housing: for them income is positively linked to length of tenure. Thomas Davidoff* (Haas School of Business, UC Berkeley) What Explains Manhattan's Declining Share of Residential Construction? Residential construction in Manhattan has fallen relative to total US residential construction over the last 45 years. This time trend has been attributed to tightening local regulation, but is entirely explained away by a combination of the decline of public housing construction and the decreasing national share of construction that is multifamily. More broadly, preponderance of multifamily housing helps explain slow construction growth in California and New York state, but not in other northeast states. Christian Hilber* (London School of Economics) Why Are Homeownership Rates So Different Across Europe? This paper exploits the panel structure of the restricted-use ECHP micro data and uses household and regional fixed effects-specifications to document that the relative cost of owner-occupied compared to rental space is the main determinant of equilibrium homeownership outcomes across Europe. The accommodation type, which proxies relative landlord production efficiency advantages and location-specific risks, has the strongest impact. A housing unit in a small apartment building is roughly 40 percent less likely to be owner-occupied than a detached house, holding household characteristics constant. Expected annualized property transaction costs in a particular market and taxation of imputed rents also have meaningful (negative) impacts on homeownership attainment. On the demand side, only age has a reasonably strong positive effect. At the regional level, the housing stock and the supply of subsidised public rental housing are the main determinants of the vast differences in homeownership rates across Europe. The fixed effects specifications can only partially explain the low homeownership rates in Germany and the high rates in Italy and Spain. It can only be speculated that country-specific, relatively time-invariant and difficult-to-quantify factors such as the strictness of rent control (in Germany) or support from parents or grandparents (in Southern Europe) explain the remaining cross-sectional variation. Session B01. Agglomeration Models Pierre Picard* (SoSS University of Manchester / Core Université catholique de Louvain), Kristian Behrens ( Core Université catholique de Louvain) Competitive transport sectors and economic geography We explore the role of the transport sector in a two-country economic geography model. A particularity of the transport sector is that carriers must commit to capacities and offer transport services in both directions of trade. We show in a footloose capital model that the home market effect is significantly attenuated by the presence of a competitive transport sector. Furthermore, the core-periphery distribution of firms can also strongly be altered by such a sector. Jacques Thisse* (CORE-UCL), Kristian Behrens (), Carl Gaigne () Is the regulation of the transport sector always detrimental to consumers? The aim of this paper is to qualify the claim that regulating a competitive transport sector is always detrimental to consumers. We show indeed that, although transport deregulation is beneficial to consumers as long as the location of economic activity is fixed, this is no longer true when, in the long run, firms and workers are freely mobile. The reason is that the static gains due to less monopoly power in the transport sector may well map into dynamic dead-weight losses because deregulation of the transport sector leads to more inefficient agglomeration. This latter change may, quite surprisingly, increase consumer prices in some regions, despite a more competitive transport sector. Transport deregulation is shown to map into aggregate consumer welfare losses and more inequality among consumers in the long run. Michael Pflüger* (University of Passau), Jens Südekum (University of Konstanz) New economic geography - A synthesis of a class of models with mobile labour Models of the new economic geography share a number of common conclusions, but also exhibit notable differences, in particular with respect to the shape of the location pattern. We approach the properties of a particular labour mobilit class of new economic geography models with a unifying framework based on the indirect utility function of mobile agents. This approach has several payoffs. We are able to provide general, yet handy, formulae to determine the break point and the bifurcation pattern. Moreover, an application of this framework allows us to show ho specific results in the literature can be reconciled as special cases, so that the origin of their difference can be highlighted. Adolfo Cristobal* (Universidad Carlos III) Trade and Migration: a U-shaped Transition in Eastern Europe This paper proposes a 2-country 3-region economic geography model that can account for the most salient stylized facts experienced by Eastern European transition economies during the 1990s. In contrast to the existing literature, which has favored technological explanations, trade liberalization and factor mobility are the only driving forces. The model correctly predicts that in the first half of the decade trade liberalization led to divergence in GDP per capita, both between the West and the East and within the East. Consistent with the data, in the second half of the decade, internal labor mobility in the East reversed this process, and convergence became the dominant force. The model furthermore shows that the same U-shaped pattern applies to relative industrialization of West and East, although within the East the hinterland continued to lose industry throughout the decade. Session B02. Agglomeration and Trade Toshihiro Okubo* (University of Manchester) Foreign Direct Investment and Spillovers with Firm Heterogeneity This paper studies the impact of technology spillovers on FDI and social welfare in the developing and developed countries framework in the presence of substantial wage gap and horizontal technology spillovers. Lower wage and spillovers in the developing country attract FDI. Allowing FDI under perfect spillovers increases the welfare in both countries. However, FDI under no spillovers is worse off welfare in the developed country but increases welfare in the developing country. Furthermore, the imperfect spillover regime could have two stable equilibria: either lower welfare or higher welfare equilibrium in the developing country. The development policies could achieve the higher welfare equilibrium with reducing welfare in the developed country. Giordano Mion* (CORE-UCL and FNRS), Gianmarco Ottaviano (), Kristian Behrens (), Gregory Corcos () Incomplete contracts, legal (dis)similarities, trade and firm productivity Incomplete contracts theory has been recently applied in international trade with respect to the outsourcing vs FDI decision in Antas (2003) and extended to firms characterized by heterogeneous productivities in Antras and Helpman (2004) and Antras and Helpman (2006). In this paper we introduce contracts’ incompleteness in the Melitz and Ottaviano (2005) heterogeneous firms’ model and in particular we focus on the relationship between the producer and the distributor. We allow for a varying degree of contractibility across countries and obtain reduced form estimable equations to simulate an improvement in contract completeness. We measure contract completeness between a pair of countries with the share of common legal procedures needed in order to obtain the payment of a bounced check (like in Turrini and van Ypersele, 2006). When introduced in our theory-based gravity equation, this variable has indeed the expected sign and a meaningful magnitude. We then estimate the structural model on a panel of 11 EU countries and simulate the implied increase in average productivity stemming from a complete legal harmonization within the EU. Our simulations indicate that average productivity will increase on average by 3.38%. However, gains vary substantially across countries and sectors depending on accessibility, competitiveness, and initial legal dissimilarities. We also map changes of productivity into implied changes in average prices, markups, quantities and profits. In order to gain a regional perspective, we further estimate a model where we consider the 94 French ‘departements’ as distinct economies and simulate the complete removal of legal frictions within France. Such frictions are proxied by the estimated decrease of inter-departement trade flows induced by the absence of a common court of appeal. We obtain the magnitude of this effect with a theoretically-consistent gravity estimation on intra-France trade. Our simulations indicate that within a ‘United legal France’ average productivity will increase by 1.48%. Again, gains vary substantially across space depending on accessibility, competitiveness, and initial legal dissimilarities. Overall, our results suggest that important legal frictions are still at work within the EU that could substantially gain from their removal. Steven Brakman* (University of Groningen), Charles Van Marrewijk (Erasmus University Rotterdam) The world of Changing Comparative Advantage In the past 50 years the structure of the world economy has changed considerably. Former developing countries have become developed countries. China and India, for example, are rapidly changing from agricultural economies towards industrial powers, and developing countries are undergoing a transition from manufacturing societies towards service economies. We analyze the consequences of these structural changes for the OECD countries, by using a detailed data set on revealed comparative advantage and a new analytical tool: the harmonic mass index. This method enables us to identify time periodes of structural change as well as the sectors responsible for the structural changes that have taken place. We find that (i) for most OECD countries the mid 1980s was a crucial period for structural changes and (ii) that the rise of China and India to a large extent explains the structural changes that have taken place. Kristian BEHRENS* (CORE, Université catholique de Louvain), Yasusada MURATA (ARISH, Nihon University), Jens SUEDEKUM (Universität Konstanz), Giordano Mion (CORE Universite catholique de Louvain) Trade, firm selection, and the ‘toughness of competition’: General equilibrium theory with applications We extend the monopolistic competition general equilibrium model by Behrens and Murata (2007, forthcoming JET) to include heterogeneous firms and endogenous ‘toughness of competition’ in a multi-country world. We show that, as in Melitz and Ottaviano (2005), firms are endogenously partitioned into three types: those which are not productive enough and leave the market; those with intermediate productivity which serve the domestic market only; and those with high productivity which self-select themselves into the export markets. Our framework does not rely on quasi-linear preferences and, therefore, allows us to take into account factor prices as in Melitz (2003). However, it features variable demand elasticity and remains highly tractable even when extended to multiple asymmetric countries. It also readily allows for empirical application and calibration exercises. Our main findings are as follows. Starting from the closed-economy case, we first show that, as in Melitz and Ottaviano (2005), larger markets have higher average productivity, lower average prices, and higher average markups. Furthermore, factor prices are higher there. Larger markets also have more entrants, but since selection is tougher, the mass of surviving firms is not necessarily larger in larger markets. It depends in general on the productivity distribution, and we show that if this distribution is Pareto, then larger markerts produce and consume indeed more variety. Larger markets are finally shown to have higher welfare. Turning to the open-economy case, we then show that the model can be readily generalized to an arbitrary number of countries. We derive the comparative statics for the two-country case. While most results are in line with Melitz and Ottaviano (2005), there are nevertheless subtle differences due to endogenous wages and which depend on the way international trade costs change relative to intranational transport costs. We characterize the equilibrium interdependencies of wages and the cutoffs in both countries and simulate various scenarios with multiple asymmetric countries. The final step consists in taking the model to the data. To do so, we apply the model to the consistent estimation of theory-based gravity equation systems and we perform various counterfactual exercises related to trade-integration scenarios. We first show that our specification yields a rich gravity equation system that, as in Anderson and van Wincoop (2003) can be estimated taking into account the general equilibrium constraints. When applied to the same Canda-US data set used by Anderson and van Wincoop (2003) and Feenstra (2002), we show that border effects are very small between the Canada and the US: average border effects are about 1.8 to 2.2, depending on the scenario considered. Using the full set of 1600 inferred border effects (one per bilateral trade flows), we show that these are largely determined by the distance to the border and the accessibility to domestic demand. Session B03. Urban Theory Matthias Wrede* (RWTH Aachen University) A distortive wage tax and a countervailing commuting subsidy Within a second-best duocentric urban economics framework, where labor income taxation distorts workplace choices on account of commuting costs, this paper studies a commuting subsidy which distorts land use. It is shown that a commuting subsidy (tax) increases welfare if and only if it shifts labor supply from less to more productive business districts. Masahisha Fujita (Konan University), Nobuaki Hamaguchi* (Kobe University) Brand Agriculture and Economic Geography: A General Equilibrium Analysis This paper presents a general equilibrium model of NEG incorporating the brand agriculture which produces differentiated agricultural products. Focusing on the core-periphery space, we show that highly differentiated brand agriculture can be sustained in the periphery even when the accessibility of the core market is not particulary good. This result gives support for promoting innovation in rural area in order to avoid direct price competition in generic commodity market under unfavorable competitive condition. Marcus Berliant (Washington University in St. Louis), Hiroki Watanabe* (Washington University in St. Louis) Explaining the Size Distribution of Cities The methodology used by theories to explain the size distribution of cities is contrived in that it takes an empirical fact and works backward to first obtain a reduced form of a model, then pushes this reduced form back to assumptions on primitives. The induced assumptions on consumer behavior, particularly about their ability to insure against the city-level productivity shocks in the model, are untenable. With either self insurance or insurance markets, and either an arbitrarily small cost of moving or the assumption that consumers do not perfectly observe the shocks to firms' technologies, the agents will never move. Equilibrium implies a uniform distribution of agents. Even without these frictions, our analysis yields another equilibrium with insurance that gives exactly the same utility level to consumers as the equilibrium studied in the literature, but where consumers never move. Thus, insurance is a substitute for movement. Even aggregate shocks are insufficent to generate consumer movement, since consumers can borrow and save. We propose an alternative class of models, involving extreme risk against which consumers will not insure. Instead, they will move. Been-Lon Chen (Academia Sinica), Shin-Kun Peng (Academia Sinica and National Taiwan University), Ping Wang* (Washington University in St. Louis and NBER) Intergenerational Human Capital Evolution, Local Public Good Preferences, and Stratification This paper considers heterogeneities in preferences over the local public good, human capital formation, and residential locations as primary underlying forces of economic stratification in an endogenously growing economy. We construct a two-period overlapping-generations model with two regions and various forms of human capital externalities where altruistic agents deterimine intertemporal allocation of time, investment in a child's education and residential location. We fully characterize a balanced growth equilibrium with no migration across generations to elaborate on how changes in preference, human capital accumulation, production, and interregional commuting parameters may affect the equilibrium stratification outcome in the long run. Session B04. Spatial Interactions Valeska Groenert (Vanderbilt Univerwity), Myrna Wooders* (Vanderbilt University), Ben Zissimos (Vanderbilt University) Hotelling Tax Competition and Standards We model competition between (Leviathan) governments who choose a tax and a standard level to maximize revenues in excess of costs of standard provision. Higher standards are more costly than providing a low level. The standard can have a variety of interpretations. It could be an environmental standard, an educational standard, a standard with respect to worker rights, the degree of anti-corruption enforcement, etc. The tax and the standard however affect a firm's profit. Given standards, firms choose jurisdictions to maximize their profits. Firms are heterogenous in their ideal standard level. The larger the difference between a jurisdiction's standard level and a particular firm's optimal level the lower the profit for this firm. Hence, both a lower and a higher than ideal standard level adversely affect profits. We refer to this difference between the firm's ideal level of standard provision and the level actually provided by the government as the degree of standard mismatch. As motivational example, consider the education system. A firm seeking a particular type of workers most likely seeks a location where the education system guarantees sufficient supply of workers with a certain level of education. Obviously, locating in a country where the overall level of education achieved is not sufficient for the firm's needs leads to additional costs. Somewhat less obvious might be the negative impact on profits from "too much" education. However, imagine a country in which every citizen obtains a minimum level of education that is relatively high. Such a country might have a shortage of certain types of labor, so that, if at all, these types would only be supplied for a sufficiently high wage. It is easy to imagine that across industries, but even within industries across different firms, the most "preferred" education level can differ widely. We use a Stackelberg model. In the first stage one government chooses the level of standard provision and the tax. In the second stage, after having observed the other government's choices, the second government sets a standard level and a tax. We choose a Stackelberg model having in mind countries with well established economies versus countries with emerging or still developing economies, and associate the former with the Stackelberg leader and the latter with the Stackelberg follower. This timing shall capture the notion that, once a country's level of amenity provision and tax system has established, and its economy is fairly stable, growing at moderate rates, radical changes in standards and/or tax levels are rarely observed. The most prominent explanation for this are political rigidities, that prevent substantial reforms. Economies, on the other hand, that are still developing at a fast rate, tend to be politically more flexible in their strategic choices.We obtain a clear-cut prediction, namely that the first-moving government is the one that provides a high standard level and charges a high tax. Roughly interpreted, this result is in line with the observation that long established economies tend to exhibit higher standard and tax levels than emerging economies. We parameterize the importance of the standard, captured by firms' profit loss through standard mismatch, and allow it to vary. Interestingly, if the importance is very low, governments cannot sufficiently differentiate themselves. Competition in prices (taxes) dominates and leads to a race to the bottom. In an intermediate range, differentiation is almost maximal, while if the standard is very important the degree of differentiation is reduced because it is worth for both governments to offer a substantial level of standard (though for different reasons). Fan-chin Kung* (City University of Hong Kong), Ping Wang (Washington University in St. Louis) Knowledge Spillovers and Spatial Network Formation This paper proposes a new approach to city formation -- the network formation approach. The main driving force of population agglomeration is uncompensated knowledge spillovers. Because knowledge can be transmitted only when both parties are linked in the network sense, the network formation approach is a natural framework to define and examine the underlying spatial configuration of the equilibrium. While it is beneficial to be connected to take advantage of knowledge transmission from other locations, maintaining a link is costly. Depending on its roles, a location may become a core, serving as a knowledge aggregation and transmission node for other connected peripheral locations. We find that a spatial equilibrium may feature monocentric, multicentric, urban-rural or multiple urban areas. We examine under which conditions a particular spatial configuration may emerge and perform comparative statics with respect to changes in knowledge spillover, link maintenance, urban land rent, rent gradient, and urban unemployment parameters. Bruce Weinberg* (Ohio State University, IZA, NBER) Social Interactions with Endogenous Associations This paper develops a model of social interactions with endogenous association. People are assumed to invest in relationships to maximize their utility. Even in a linear-in-means model, when associations are endogenous, the effect of macro-group composition on behavior is non-linear and varies across individuals. We also show that larger groups facilitate sorting. Using data on associations among high school students, we provide a range of evidence consistent with our model. Individuals associate with people whose behaviors and characteristics are similar to their own. This tendency is stronger in large groups. We also show that behaviors vary within and between macro-groups in the way predicted by endogenous association. Marcus Berliant* (Washington University in St. Louis), Masahisa Fujita (Kyoto University) The Dynamics of Knowledge Diversity and Economic Growth How is long run economic growth related to the diversity of knowledge? We formulate and study a microeconomic model of knowledge creation, through the interactions among a group of R & D workers, embedded in a growth model to address this question. Income to these workers accrues as patent income, whereas transmission of newly created knowledge to all such workers occurs due to public transmission of patent information. Our model incorporates two key aspects of the cooperative process of knowledge creation: (i) heterogeneity of people in their state of knowledge is essential for successful cooperation in the joint creation of new ideas, while (ii) the very process of cooperative knowledge creation affects the heterogeneity of people through the accumulation of knowledge in common. The model features myopic R & D workers in a pure externality model of interaction. Surprisingly, in the general case for a large set of initial conditions we find that the equilibrium process of knowledge creation converges to the most productive state, where the population splits into smaller groups of optimal size; close interaction takes place within each group only. Equilibrium paths are found analytically. Long run economic growth is positively related to both the effectiveness of pairwise R & D worker interaction and to the effectiveness of public knowledge transmission. If we define efficiency constrained by the monopolistic competition environment for consumption goods, our equilibrium paths are constrained efficient. Session B05. Structural Empirical Analysis Constant Tra* (University of Maryland) Equilibrium Welfare Impacts of the 1990 Clean Air Act Amendments in the Los Angeles Area This study develops a discrete choice locational equilibrium model to evaluate the benefits of the air quality improvements that occurred in the Los Angeles area following the 1990 Clean Air Act Amendments (CAAA). The discrete choice equilibrium approach accounts for the fact that air quality improvements brought about by the 1990 CAAA will change housing choices and prices. The study provides the first application of the discrete choice equilibrium framework (Anas, 1980, Bayer et al., 2005) to the valuation of large environmental changes. The study also provides new evidence for the distributional welfare impacts of the 1990 CAAA in the Los Angeles area. Households’ location choices are modeled according to the random utility framework of McFadden (1978) and the differentiated product specification of Berry, Levinsohn and Pakes (1995). Findings suggest that the air quality improvements that occurred in the Los Angeles area between 1990 and 2000 provided an average equilibrium welfare benefit of$1,800 to households. In contrast, average benefits are \$1,400 when equilibrium price effects are not accounted, demonstrating that ignoring equilibrium effects will likely underestimate the benefits of large environmental changes. We find that the equilibrium welfare impacts of the 1990 CAAA in the Los Angeles area varied significantly across income groups.

Takatoshi Tabuchi* (University of Tokyo), Kentaro Nakajima (University of Tokyo)

Estimating Interregional Utility Differentials

The examination of long-term Japanese data on interregional migration revealed three stylized facts of migration behavior. Based on the facts, we formulated an operational model and estimated interregional utility differentials. We found that the interregional utility differentials have been converging until the late 1970s. We showed that the utility estimates are highly correlated with per capita real income. We also applied the model to interregional migration in the United States and Canada as well as the interindustry movement in Japan and confirmed the model’s validity.

Dennis Epple (Carnegie Mellon University), Judy Geyer (Carnegie Mellon University), Holger Sieg* (Carnegie Mellon University )

Meeting the Challenges of Public Housing Policies in A Large Metropolitan Area

The goal of this paper is to analyze public housing policies in a large urban metropolitan area. We focus on communities owned and managed by the Housing Authority of the City of Pittsburgh. Although participation guidelines and funding are controlled at the federal level, a local housing oversees many implementation issues that influence the program uniquely, including supply, community and neighborhood quality, wait-list implementation, and exit opportunities. The empirical analysis is based on a unique restricted use panel data set that allows us to follow low income households over a five year period. We find that heterogeneity in public housing communities is important in explaining households' decisions to enter and exit public housing. The paper also documents the importance of with-in program transfers. These transfers reflect a combination of desirability, events planned by the housing authority, and the turn-over rates of different communities. Tenant-initiated transfers and exits from public housing allow us to evaluate the relative desirability of different types of public housing communities. Understanding the link between community-specific amenities and mobility provides new insights for the design of better housing policies.

Pierre-Philippe Combes (University of Aix-Marseille), Gilles Duranton (University of Toronto), Laurent Gobillon (Institut National d'Etudes Démographiques), Diego Puga* (Madrid Institute for Advanced Studies (IMDEA) and Universidad Carlos III), Sébastien Roux (Centre de Recherche en Économie et Statistique)

The productivity advantages of large markets: Distinguishing agglomeration from firm selection

Firms tend to be more productive in larger markets. For a long time, this fact has been attributed to agglomeration economies (due, for instance, to the possibility of similar firms sharing suppliers, the existence of thick labour markets facilitating matching or ironing out firm-level shocks, or the possibility to learn from the experiences and innovations of others). More recently, it has been suggested that the relationship between productivity and market size could instead result from a stronger Darwinian selection of firms in larger markets, were competition is tougher. To distinguish between these two explanations, we develop a model that nests the firm selection model of Melitz and Ottaviano (2005), generalised to free it of specific distributional assumptions and allow for any number of locations, and a model of agglomeration economies in the spirit of Fujita and Ogawa (1982) and Lucas and Rossi-Hansberg (2002). This nested model allows parameterizing the relative importance of agglomeration and selection and delivers some powerful predictions: stronger selection effects in larger markets should lead to an increased left truncation of the distribution of productivities of active firms whereas stronger agglomeration effects should lead to a rightwards shift of the distribution of firm productivities. We then use this prediction to assess the relative importance of agglomeration and firm selection for different sectors using plant-level data for all French firms.

Session B06. Agglomeration and its Effects I

Gilles Duranton* (University of Toronto), Pierre-Philippe Combes (University of Aix Marseille), Laurent Gobillon (Institut National d’Etudes Démographiques), Sébastien Roux (Institut National de la Statistique et des Etudes Economiques)

Estimating agglomeration effects: Does playing with different instruments give a consistent tune?

We estimate agglomeration effects using wage and firm level data. We focus on the possible endogenity of agglomeration using a range of instruments.

Stuart Rosenthal (Syracuse University), William Strange* (University of Toronto)

Small Establishments/Big Effects: The Impact of Agglomeration and Industrial Organization on Entrepreneurship

This paper considers the impact of local industrial organization on agglomeration economies. The paper begins by presenting a theory of agglomeration, industrial organization, and entrepreneurship whose key prediction is the existence of a virtuous circle of urban entrepreneurship: the presence of small establishments produces an environment conducive to growth, in particular entrepreneurial growth. This paper investigates this prediction empirically, showing that additional activity at a small establishment is associated with a larger amount of entrepreneurial activity in manufacturing, services, and FIRE. There is also a positive relationship in many individual two digit industries.

Jason Faberman* (Federal Reserve Bank of Philadelphia)

The Relationship between the Establishment Age Distribution and Urban Growth

This paper presents new evidence on the relationship between a metropolitan area’s employment growth and its establishment age distribution. I find that cities with a relatively younger distribution of establishments tend to have higher growth, as well as higher job and establishment turnover. Geographic variations in the age distribution account for 38 percent of the geographic differences in growth, compared to the 32 percent accounted for by variations in industry composition. Differences are disproportionately accounted for by entrants and young (5 years or younger) establishments. Furthermore, the relationship between age and growth is robust to controls for urban diversity and education. Overall, the results support a microfoundations view of urban growth, where the benefits of agglomeration affect firms not through some production externality, but through a process that determines which firms enter, exit, and thrive at a given location.

When Do Clusters Matter for Regional Economic Performance?

This paper evaluates the role of regional cluster composition in the economic performance of regional industries, clusters and regions. Except in narrow circumstances, the traditional distinction between industry specialization and regional diversity is misplaced, failing to capture the linkages among related industries or the importance of spillovers from proximate regions. Building on Porter’s (1990, 2001) concept of clusters, we offer a systematic evaluation of the relationship between regional cluster composition and the employment and patent growth of regions and their clusters. The cluster framework suggests three key spillovers influencing economic performance: within cluster, across related clusters, and across common clusters in neighboring regions. Using newly available data from the US Cluster Mapping Project, the empirical analysis exploits a rich panel dataset at the industry-cluster-region level between 1990 and 2003. We specify growth models that simultaneously accommodate convergence and agglomeration effects. The convergence effects will occur at the narrowest level (e.g., industry-level) and the agglomeration forces are tested above that level of analysis (e.g., clusters and related clusters). To address the potential endogeneity between regional cluster composition and subsequent economic performance, we include detailed controls for the attributes of industries, clusters, regions and neighboring regions. We document the following principal findings. We find convergence and agglomeration effects in industry, cluster and region growth. Regarding the agglomeration effects, industries participating in a strong cluster are associated with higher patent and employment growth. Both industry and cluster level growth increase with the presence of related clusters in the region, and with the specialization of neighboring regions in the same cluster. Finally, a region’s leading clusters (i.e., those highly over-represented in the region) contribute to the employment and patenting growth of other traded and local clusters in the region. Overall, these findings suggest that regional clusters play a central role in regional economic performance.

Session B07. Agglomeration and its Effects II

Jed Kolko* (Public Policy Institute of California)

Agglomeration and Co-Agglomeration of Services Industries

Economic research on industry location and agglomeration has focused nearly exclusively on manufacturing. This paper shows that services are prominent among the most agglomerated industries, especially at the county level. Because traditional measures of knowledge spillovers, natural resource inputs, and labor pooling explain little of agglomeration in services industries, this paper takes an alternative approach and looks at co-agglomeration to assess why industries cluster together. By considering the location patterns of pairs of industries instead of individual industries, the traditional agglomeration explanations can be measured more richly, and additional measures – like the need to locate near suppliers or customers – can be incorporated. The results show that co-agglomeration between pairs of services industries is driven by knowledge spillovers and the direct trading relationship between the industries, especially at the zip code level. Information technology weakens the need for services industries to co-agglomerate at the state level, perhaps because electronic transport of services outputs lowers the value of longer-distance proximity. These results are in sharp contrast to results for manufacturing, for which labor pooling contributes most to co-agglomeration, and the direct-trading relationship contributes more to state-level co-agglomeration. These differences between services and manufacturing are consistent with simple models of transport costs.

Mark Partridge* (The Ohio State University), Dan Rickman (Oklahoma State University), Kamar Ali (University of Saskatchewan), M. Rose Olfert (University of Saskatchewan)

Agglomeration Spillovers and Wage and Housing Cost Gradients across the Urban Hierarchy

The tyranny of dfistance in terms of its effect on median earnings and housing costs is examined for rural and urban U.S. counties. First, we develop a series of distance metrics that measure an area's remoteness from the various tiers of the urban hierarchy. Second, we consider geographical access of buyers and sellers through market-potential measures typical of those used in empirical studies of the New Economic Geography. The results reveal that non-metro counties are subject to penalties of about 5 to 8% for median earnings and 14 to 20% for housing costs due to their remoteness from the combined tiers of the urban hierarchy. There are comparable urban hierarchy distance penalties for small and medium metropolitan areas. Differe3nces in market potential also influence factor prices, but these effects are generally smaller than those produced by urban hierarchy distances. Examining both earnings and housing costs allow us to conclude that the penalty for distance works primarily through the effects on firm location, not through household location. Visually depicting these results using maps illustrates that urban hierarchy distance penalties dominate in the western U.S., but the influence of market potential and urban hierarchy are about equal in the East.

Stuart Rosenthal* (Syracuse University), William Strange (University of Toronto)

Female Entrepreneurship, Agglomeration, and a New Spatial Mismatch

Female entrepreneurs may be less networked than their male counterparts and may face higher commuting costs because of greater domestic burdens. This paper develops a theoretical model of female entrepreneurship showing that these differences can lead to the segregation of male- and female-owned businesses, with female entrepreneurs choosing locations further from agglomerations of economic activity. The model also predicts that the relationship between agglomeration and output will be weaker for female-owned businesses, and that female entrepreneurs will commute shorter distances. The paper’s empirical results are consistent with these predictions. Using 2007 Dun and Bradstreet data for 35 industries, we find that male and female businesses are segregated, often to a degree similar to that observed for black-white residential patterns. Female-owned enterprises are located in less agglomerated areas: their local environment frequently features 10 to 20 percent less own-industry employment within one mile. In addition, the elasticity of sales per worker with respect to nearby own-industry employment is significantly lower for women-owned businesses. Further analysis based on the 2000 Census confirms that self-employed women commute shorter distances than their male counterparts, especially when children are present. In this case, the male-female differential is roughly 20 percent. Together, these results demonstrate that the location pattern of female business is quite different than for male-owned business. These results are completely new, and suggest the existence of a new type of spatial mismatch, where female businesses are less likely to be found in highly interactive, innovative, and productive centers of activity.

Octavio Figueiredo (Universidade do Porto), Paulo Guimaraes* (University of South Carolina), Doug Woodward (University of South Carolina)

Localization Economies and Establishment Scale: A Dartboard Approach

This paper assesses the relationship between geographic concentration (localization) and establishment scale. Previous work on this subject by Holmes & Stevens(2002) found a positive association between establishment size and industry localization, contrary to the predictions that follow from Marshall's concept of external economies in industrial districts. This prior analysis was based on the employment location quotient, which combines internal scale economies and industry externalities in one measure. Our alternative localization index overcomes this serious limitation and offers a number of additional advantages in measuring geographic concentration. Notably, the index is theoretically grounded, using an approach that builds on the framework of Ellison & Glaeser (1997). Testing this measure, we find evidence that plants located in areas where an industry exhibits localization economies are smaller than plants in the same industry outside such areas. This conforms with the predictions of Marshallian industrial districts.

Session B08. Urban Evolution

Maarten Bosker* (Utrecht University), Jan Luiten van Zanden (International Institute of Social History), Eltjo Buringh ()

From Baghdad to London. The rise and fall of cities in Europe and the Arab world 800 – 1800

Wen-Chi Liao* (University of Minnesota)

Outsourcing and Computers: Impact on Urban Skill Levels and Land Prices

Cities in the U.S. with a higher initial share of college graduates have had a greater subsequent increase in this share over the past two decades. Concurrently, land prices have grown faster in these skilled cities. This paper argues that the diffusion of computers and outsourcing may partly explain these two phenomena. In the presented model, skilled workers are more productive in skilled cities and need unskilled support services. The cities' unskilled workers can perform support services, but, when it is cheaper, such services can be undertaken by computers or outsourced to less-skilled cities. New technologies facilitating computerization and outsourcing can increase the skill levels and land prices in skilled cities, under fairly general assumptions. The basic economics of the analysis is that the new technologies diminish the need for unskilled workers in skilled cities and permit skilled workers to earn higher wages. The technological gains increase the demand for skilled workers to live in skilled cities and drive up land prices. Empirically, this paper documents five stylized facts that the theory rationalizes. Particularly important is the rising skill premium in skilled cities relative to less-skilled cities, which supports a production theory.

Klaus Desmet* (Universidad Carlos III and CEPR), Esteban Rossi-Hansberg (Princeton University)

Spatial Growth and Industry Age

U.S. county data for the last 20 or 30 years show that manufacturing employment has been deconcentrating. In contrast, the service sector exhibits concentration in counties with intermediate levels of employment. This paper presents a theory where local sectoral growth is driven by technological diffusion across space. The age of an industry –measured as the time elapsed since the last major general purpose technology innovation in the sector– determines the pattern of scale dependence in growth rates. Young industries exhibit nonmonotone relationships between employment levels and growth rates, while old industries experience negative scale dependence in growth rates. The model then predicts that the relationship between county employment growth rates and county employment levels in manufacturing at the turn of the 20th century should be similar to the same relationship in services in the last 20 years. We provide evidence consistent with this prediction.

Yannis Ioannides (Tufts University), Henry Overman* (London School of Economics), Esteban Rossi-Hansberg (Princeton), Kurt Schmidheiny (Universitat Pompeu Fabra)

The Effect of Information and Communication Technologies on Urban Concentration

We study how information and communication technologies (ict) affect cities. Our empirical approach uses Zipf coefficients to summarise the city size distribution and then seeks to explain differences in these coefficients across countries and time. We find robust evidence that telephones disperse urban population across cities. Evidence on internet usage is more speculative, but goes in the same direction.

Session B09. Labour Markets

Joel Elvery* (Cleveland State University)

City Size and Skill Intensity

Many have theorized that the productivity of human capital increases with city size. If this were true, one would expect that establishments in large cities are more skill intensive than those in small cities, even within industry. In this paper, I use data on the occupational mix at establishments to test whether the skill intensity of production methods varies with city size. Using data from the Occupational Employment Statistics survey and conditioning on detailed industry and establishment size, I show that establishments located in metropolitan areas with population below one million use a less skill intensive mix of workers than a comparable group of establishments in metropolitan areas with population above two million. The differences in skill intensity are not the same in all industries; establishments in relatively skill intensive industries are even more skill intensive in large MSAs. I interpret these results as evidence that the productivity of skilled labor is higher in large metropolitan areas than in small metropolitan areas.

Sanghoon Lee* (University of British Columbia), Jinxiong Li (University of Minnesota)

Colocation Problem and Recruiting Policies of Academic Couples

The rise of the academic couples has had a big impact on rural universities because of the collocation problem. This paper develops a theory of the couples' co-location problem where the behavior of universities is explictly modeled. Central to the analysis is the potential incentive of universities to adopt a couple average standard, i.e. the univertities might lower the normal standard for one part of the couple to get the other half of the couple who might be particularly good. We show that it will always be in the incentive of a university to practice such a standard, particularly rural universities. But our main result is that adoption of this policy turns out in equilibrium to reduce quality in rural universities.It is a kind of prisoners delimma: It is invidiaully rantional for universities to behave this way but collectively this turns out to be bad for rural universities. Our paper has several empirical predictions. The first prediction holds regardless of whether a couple standard or an individual standard is used. This prediction is that rural universities will be more likely to hire couples. Using new data, we find strong evidence of this. Our second prediction only applies if there is couple averaging. We also assume the averageing is more likely to take place at the unit level (say the department of economics) than across departments, given that departments are also ran is individual maxiziers. We find that in this case, conditional on a couple being hired by a university, it is more likely in a rural area that they be in the same field.

Hoyt Bleakley (University of Chicago), Jeffrey Lin* (University of California, San Diego)

Thick-Market Effects and Churning in the Labor Market: Evidence from U.S. Cities

Using U.S. Census microdata, we show that, on average, workers change occupation and industry less in more densely populated areas. The result is robust to standard demographic controls, as well as to including aggregate measures of human capital and sectoral mix. Analysis of the displaced worker surveys shows that this effect is present in cases of involuntary separation as well. On the other hand, we actually find the opposite result (higher rates of occupational and industrial switching) for the subsample of younger workers. These results provide evidence in favor of increasing-returns-to-scale matching in labor markets. Results from a back-of-the-envelope calibration suggest that this mechanism has an important role in raising both wages and returns to experience in denser areas.

Curtis Simon* (Clemson University), Todd Kendall (Clemson University)

Urban Rise and Decline: Implications for the Labor Market

A recent paper by Edward L. Glaeser and Joseph Gyourko (2005) points out that urban decline is not the mirror image of urban growth due to the presence of durable housing. One alternative hypothesis for the persistence of urban decline is the immobility of people. Glaeser and Gyourko rejected this hypothesis on the grounds that even declining cities experience significant inflows of migrants. However, studies of the labor market (Robert Topel 1986; John Bound and Harry Holzer 2000) suggest that certain groups of workers are, indeed, less mobile than others. This paper examines the extent to which urban decline is a function of the availability of cheap, durable housing versus the immobility of certain types of labor. The views of Glaeser-Gyourko and Topel-Bound/Holzer are not necessarily mutually exclusive. The empirical section tests the implications of the extended Glaeser-Gyourko and Bound/Holzer models using census data for CMSAs between 1980 and 2000. Like Bound and Holzer, we find that less-educated and minority workers seem to be less mobile than average. As implied by Glaeser and Gyourko, we find that wages, like rents, respond asymmetrically to changes in local demand. Further empirical analysis suggests that while durable housing plays the key role in the persistence of declining cities, the immobility of some demographic groups determines precisely who ends up living in those cities.

* Presenter