William C. Strange

Evidence on the Nature and Sources of Agglomeration Economies

This paper considers the empirical literature on the nature and sources of urban increasing returns, also known as agglomeration economies. An important aspect of these externalities that has not been previously emphasized is that the effects of agglomeration extend over at least three different dimensions. These are the industrial, geographic, and temporal scope of economic agglomeration economies. In each case, the literature suggests that agglomeration economies attenuate with distance. Recently, the literature has also begun to provide evidence on the microfoundations of external economies of scale. The best known of these sources are those attributed to Marshall (1920): labor market pooling, input sharing, and knowledge spillovers. Evidence to date supports the presence of all three of these forces. In addition, there is also evidence that natural advantage, home market effects, consumption opportunities, and rent-seeking all contribute to agglomeration.

Geography, Industrial Organization, and Agglomeration

This paper makes two contributions to the empirical literature on agglomeration economies. First, the paper uses a unique and rich database in conjunction with mapping software to measure the geographic extent of agglomerative externalities. Previous papers have been forced to assume that agglomeration economies are club goods that operate at a metropolitan scale. Second, the paper tests for the existence of organizational agglomeration economies of the kind studied qualitatively by Saxenian (1994). This is a potentially important source of increasing returns that previous empirical work has not considered. Results indicate that localization economies attenuate rapidly and that industrial organization affects the benefits of agglomeration.

MATCHING AND AGGLOMERATION ECONOMIES IN A SYSTEM OF CITIES

Abstract This paper examines resource allocation in a system of cities with heterogenous workers and firms and imperfect information. We derive an agglomeration economy in the labor market from a matching process between workers and firms, and show that it has the characteristics of a local public good. We illustrate two externalities associated with firm location, and show that they render free entry equilibria inefficient. We analyze the formation of equilibrium cities as a game, and argue that since profit maximizing land developers cannot control the number of firms directly, they cannot attain efficient city sizes.

The Timing and Intensity of Investment

Although there has been extensive analysis of the timing of investment, the intensity of investment has received far less attention. This paper analyzes both. For incremental investment, the intensity of investment proceeds as does timing in the fixed intensity new-view models. For lumpy investment, intensity and timing behave in strikingly different ways. Changes that encourage earlier investment can lead to lower intensity when investment occurs. Thus, the effect of such changes on the capital stock is ambiguous. The paper also makes a general comparison of intensity under incremental and lumpy investment, showing that both the capital stock and the uncertainty-investment relationship are different in the two regimes.

Strategic growth controls

Abstract This paper considers the strategic adoption of policies to control urban growth in a closed system of communities. We show that welfare-decreasing growth controls may be enacted even by profit-maximizing developers. This is a strong result, since developers are more likely to have incentives that are consistent with efficiency than are voters. The advantage of controlling growth is that it exerts a negative externality on uncontrolled communities; a higher population leads to a lower utility level, which makes consumers willing to pay more to live in a controlled community. We also prove that more restrictive growth controls are imposed when the negative effect on uncontrolled communities is stronger. In other words, there is more exclusion when the social cost of exclusion is higher. Finally, we establish that growth controls that restrict population are not strategically equivalent to those that act on the price of development. In particular, population controls are strategic substitutes, while price controls are strategic complements.

Agglomeration economies and urban capital markets

Abstract This paper presents a model of urban capital markets in which credit is allocated among risky investment projects in cities of various sizes. Because capital assets are specialized and immobile, the default value of a project depends on the second best use of its assets, and this is expected to be more valuable in large cities. Thus, city size provides external collateral, a public input in urban capital markets. This suggests that one source of agglomeration economies is the relative stability of large urban areas. It also implies that large areas will undertake a more extensive range of projects.

Agglomeration and Hours Worked

This paper establishes the existence of a previously overlooked relationship between agglomeration and hours worked. Among nonprofessionals, hours worked decrease with the density of workers in the same occupation. Among professionals, the relationship is positive. This relationship is stronger for the young than for the middle-aged. Moreover, young professional hours worked are especially sensitive to the presence of rivals. The paper shows that these patterns are consistent with the selection of hard workers into cities and with the high productivity of agglomerated labor. The behavior of young professionals is also consistent with the presence of keen rivalry in larger markets, a kind of urban rat race.

FEMALE ENTREPRENEURSHIP, AGGLOMERATION, AND A NEW SPATIAL MISMATCH

Female entrepreneurs may be less networked than their male counterparts and so derive less benefit from agglomeration. They may also have greater domestic burdens and therefore have higher commuting costs. This paper develops a theoretical model showing that either of these forces can lead to the segregation of male- and female-owned businesses, with female entrepreneurs choosing locations farther from agglomerations and commuting shorter distances. Empirical analysis is consistent with these predictions. Female-owned businesses are segregated, often to a degree similar to black-white residential segregation. Female-owned enterprises are less exposed to agglomeration, with 10% to 20% less own-industry employment nearby.

Overlapping neighborhoods and housing externalities

Abstract This paper explores the roles of distance and feedback in neighborhood effects. Conventional models employ positive feedback and feature neighborhoods that stand apart, like islands. When neighborhoods overlap a change in land use in one location can induce changes in land use across the city. Furthermore, equilibrium land use is unlikely to be symmetric. With negative feedback, indirect neighborhood effects can lead to comparative static changes in density and price that cycle. These cycles can reduce the ability of coarse zoning to achieve an optimum and can make measurement of neighborhood effects a difficult undertaking.

Exclusion and the theory of clubs

This paper examines the competitive provision of club goods with costly exclusion. The authors consider two exclusion regimes: fine and coarse. With fine exclusion, a provider can charge both a membership fee and a per use price. With coarse exclusion, a provider can charge a membership fee only. The authors show that competitive club good providers choose both the efficient exclusion regime, which depends on the costs of exclusion, and the associated efficient resource allocation. Thus, with costly exclusion, the competitive provision of club goods is constrained Pareto efficient.