2Agglomeration Economies Externality in production.What is this?Q=G(N)*f(K,L)N=indicator of city size or industry sizeNote that the agglomeration effect, G(N) is external to the firms’ production function, f(K,L,D)Economies of Agglomeration: MG/MN>0Diseconomies of Agglomeration: MG/MN<0
3Agglomeration Economies and Diseconomies Cost(time)DR to externaleconomiesIR to externaleconomiesN
4Urbanization Economies N is size of cityCost savings from being in larger city.Better business services (greater variety).Economies of scale in input supply for all industries.Local labor market efficienciesComplementarity (e.g., secondary labor market)Economies from interaction - Jacobs argumentInter-industry knowledge spilloversHow do we know these are eventually exhausted?
5Localization Economies N is size of industry in which firm is operating.This is clustering of firms in an industrye.g., Silicon Valley, Detroit, etc.SourcesFirm specific business savings due to scale economies in intermediate inputs.Unique labor marketsKnowledge spillovers (intra-industry)Can lead to Incubation processValuable initially, later erodes
6Agglomeration in Marketing Shopping externalitiesWhy do these exist?Imperfect substitutabilityComplementarity in goodsShopping mallsRetail clustersThese have been changingWhy and how?
7Article by Ray VernonVernon looks at NYC in the late 1950’s and looks at a number of its disadvantages:No natural resource advantagehigh relative wagescostly commuting expensesdeclining importance of portYet certain types of companies continue to locate there.Why?
8Common Characteristics Establishments with low overhead.Why?Look at Tables 1 and 2They face an uncertain futureSurvival requires ability to adapt quickly.They continue to rely upon face-to-face contactWhy not other forms of communication?
9Look at some of his examples Small dressmaking shopsRapidly changing environment.Need to meet with specialists from other firms frequently.Military electronicsProducts are unique and change rapidly.PrintingUnique jobsPublishingUse of specialists
10These are Agglomeration Economies Urbanization or Localization?
11Parallels to Corporate HQ’s Many firms have their corporate headquarters in NYC.156 of Fortune 500 in 1958.They face uncertain future.Corporations need to make use of banking, economic, financial, legal, accounting specialists.Advantage of being near Wall Street.Need to be able to respond quickly.
12Why firms leave? Advantages can erode. Example of insurance companies.As technologies mature, some activities are get exported to lower cost production areas.Radio example.As industry grows, pull to lower cost regions grows.More later on this.
13Insights from article Vernon Why look at such an old article? Insights for today?Are things changing?
14Empirical Evidence on Agglomeration Economics MSAE emphasizes empirical tools.We scratch the surface here.Text gives other studies out thereBriefly look at findings of one paper that estimated agglomeration economies.Looked at both urbanization and localization economicsI haven’t assigned this, but for those who are interested, the citing is:Ronald Moomaw, “Agglomeration Economies: Localization or Urbanization: Urban Studies, 1988, Vol 25, pp
15Overview of MoomawNotes that single measures of agglomeration in a production function can be misleading.Should separate urbanization and localization economies.Classifies 2-digit manufacturing industries according to their degree of localization (clustering near firms in same industry) and urbanization (clustering in larger urban areas).
16Empirical Approach Take a specific form of the production function. Assume specific form for urbanization and localization economies.Manipulate this equation so that it can be estimated.Mathematically derive a labor demand function based on marginal productivity theory of production.Estimate parameters of urbanization and localization.
17FindingsMost urbanized industries typically have significant urbanization and/or localization economies.Least urbanized industries have no urbanization or localization economies.Agglomeration economies are primarily localization economies.Some evidence of diseconomies of urbanization.
18Overview of Additional Empirical Evidence John Quigley article – “Urban Diversity and Economic Growth” reprinted from Journal of Economic Perspectives, 1998 (Vol. 12, No. 2) ppPresented by Mike
19History of Urbanization Look at figure in book (2-4)Urbanization at about 7% in 1800Urbanization at about 75% by 1990.Variety of factors at workRapid acceleration of Urbanization during Industrial RevolutionAgricultural RevolutionManufacturing RevolutionConstruction RevolutionMr. Otis’ contributionTransportation RevolutionInter- and intra-cityAll were necessary, none was sufficient to generate urbanization.
20History of U.S. Urbanization: Centralization and Concentration 1920CentralizationDecentralizationDeconConcentrationConcentration179019701980
21Brief update of metro/nonmetro growth patterns for 1990’s Long and Nucci (Environment and Planning A, 1997, Vol. 29)Show that nonmetro areas are still growing slower than metro areas (ie., similar to most historical time periods)However, growth in nonmetro counties is accelerating and growth in metro counties is decelerating.Thus: Some similarities to 1970’s trend.
22Reasons for Decentralization Automobile and truck have led to suburbanization of population and employment.Income growth and blight-flight process have reinforced the process.More later in semester.
23Reasons for Deconcentration in 1970’s. Gerald Carlino evaluates this phenomenon“Declining City Productivity and the Growth of Rural Regions: A Test of Alternative Explanations”Journal of Urban Economics, 1985, Vol. 18, ppPresented by Rose
24Limiting Factors on City Growth What factors limit size of cities?Internal scale economiesAgglomeration economiesMarket size and transportation expensesCongestion and compensating differentialsWhat about the role of telecommunications?Should these strengthen or weaken pull towards cities?Briefly review paper by Gaspar and Glaeser.On reserve, but I have not assigned it.
25Insights from Gaspar and Glaeser “ Information Technology and the Future of Cities”, Journal of Urban Economics, 1998,Vol. 43, ppEvaluates whether information technology will ultimately make it unnecessary to locate in citiesie., move to a “spaceless world”Two opposing forces:Substitution effect: Telecommunications innovations substitute for face-to-face meetings.Scale effect: Telecommuncations innovations increase frequency of contact, and hence can increase demand for face-to-face meetings.Thus: This is an empirical issue
26Overview of Model Theoretical Model of Interactions: Describes choice process whereby an individual confronted with project with expected value (ie., return) must decide:Do this privately (without making new contacts)Do this jointly with new contacts with another personIf joint:Face-to-face (high intensity meeting)Telecommunications (low intensity meeting)Discontinue contactDevelops equilibrium conditions and then does comparative statics to evaluate impact of telecommunications advances on equilibrium
27Theoretical Findings: As telecommunications improve, more initiated contacts will lead to more exclusive telephone relationships. (Substitution effect)As telecommunications improve, there will be more initiated contacts, since expected return from contact increases. (Scale effect)Conclusion:If substitution effect dominates: Less need for city locationsIf scale effect dominates: More need for city location
28Empirical evidence Telephones and distance Business travel U.S. evidence:In mid-1970’s, more than 40% of phone calls made to places within 2-mile radius, and more than 75% within 6 mile radius.Japanese evidence:#calls between 2 perfectures=f(pop, income, price, distance)Distance coefficient is negative and significant.Business travelPositive relationship between business travel and telecommunications advances
29Evidence - continued Co-authorship in Economics Cities and telephones Rising tendency over timeIncreases number of long-distance co-authorships, but also local co-authorships.Cities and telephonesJapanese data shows:Minutes per household = f(income, urban status)Positive and significant coefficient on urban status (ie., increases telephone interactions)U.S.:Expenditures/capita rise with city size.Historically: telephone use rises with urbanization
30ConclusionsGrowth in telecommunications has not diminished need for face-to-face.Innovations in telecommunications are likely complementary, not substitutes.
31What does the future hold? Look at another article by Glaeser:“Are Cities Dying?”Journal of Economic Perspectives, Vol. 12(2), Spring 1998, ppFocuses on role of “agglomerating” vs. “congesting” forces and discusses which are likely to dominatePresented by: Joe
32Dorian Friedman – U.S. News and World Report article Suggests that Downtown regions are experiencing some type of renaissance.Sparked by downtown construction of entertainment facilitiesInmigration of empty-nestersGrowth of cultural attractionsIs this consistent with other perspectives?What type of agglomeration is emphasized here?Do you think this is happening?
33The Economist ArticleFocuses on the revitalization of Chicago’s State Street“Transit mall” experiment scrappedThrough-traffic re-introducedRole of demographicsEmpty-nesters (young and old)Attraction of retailers (more later in semester)Role of TIF districtsSome controversyConclusion
34Role of Comparative Advantage We now understand why cities existInternal Scale EconomiesExternal Economies or Agglomeration EffectsCan be Localization and/or UrbanizationNow we turn to models of where cities evolveWill consider both the locational choices of people and firms.Two sides of labor market as well as retirees.
35Comparative Advantage and Location of Cities Look at cost-minimizing behavior of firms in context of model where friction of space is introduced.Comparative Advantage:A firm can produce a product at lower opportunity cost than firms in other regions.Explains why regions specialize.
36There are Two Types of Firms Transfer OrientationGeographic differences in transport costs are more important than geographic differences in other costs.Cost of transportation of raw materials vis a vis finished product is driving force.Examples include steel, autos, beer.Local Input Cost OrientationGeographic differences in other inputs (labor, land, capital, energy, amenities) more important than transport costs.Pull of non-transport factors is driving force.Examples include textiles, computers, R&D
37Transfer-Oriented Production Firms Start with very simple assumptions and later relax them.Assume firm produces single output, sold at single point (market=M) and uses raw materials from single source (Forest=F).Only one input needs to be transported. All others are ubiquitous.There is a comparative advantage for the input at F, and it is not available elsewhere.
38Assumptions - continued Firm does not substitute among inputs (fixed proportions).Firm is small in relation to input and output markets.Transport costs are constant/mile at t.There is single mode of transport.
39Total Transport Costs F M Total Distance = xm Total Transport Costs Total Transport CostsF MTotal Distance = xm
40Plant Can Locate Anywhere Total Transport Costs Total Transport CostsF Plant M(x) (xm-x)
41Two types of costs Procurement costs Distribution costs These are costs associated with procuring the inputs from the forest to the plant.PC=wi*ti*(x)wi*ti=monetary weightDistribution costsThese are costs associated with distributing the final product from the plant to the marketPC=wo*to*(xm-x)wo*to*=monetary weight
42Procurement CostsProcurement Costs Procurement Costsslope= wi*tiF M
43Distribution Costs slope= wo*to F M Distribution Costs Distribution Costsslope= wo*toF M
44Combining two costs Total Transport Costs Cost min. F M Total Transport Costs Total Transport CostsTotal Transport CostsCostmin.F M
45Question: What determines the optimal location Compare the monetary weights of the inputs and the output.
46Market Orientation (aka-weight gaining process) Total Transport Costs Total Transport Costswi*ti <wo*toCostmin.F M
47Materials Orientation (aka-weight losing process) Total Transport Costs Total Transport Costswi*ti >wo*toCostmin.F M
48Why do we always get endpoint solutions? Because monetary weights are constants.
49Adding realismTerminal costs are costs associated with loading and unloadingThese increase if you locate at intermediate locations.Nonconstant values for ti and to.we expect t falls with distance shipped.Look at implications for our model
50Transport Costs function of distance Total Transport Costs Total Transport CostsTotal Transport CostsCostmin.F M
51Adding in Terminal Costs Total Transport Costs Total Transport CostsCostmin.TF M
52Question: Does realism increase or decrease the likelihood of an endpoint solution?
53Allow multiple markets Assume inputs are all ubiquitous.Keep simple assumptions of constant transport costs.If transportation costs are important, then firms will choose Median locationAssume each input weighs 1 lb. and transport costs per mile are $2.00.Monetary weight per customer=wo*to=1*2=2Assume markets are 1 mile apart.
54Principle of Median Location: Distribution of Customers and Monetary Weight Middle Point43 customers43 customersCustomers:MW=wo*to:Sum of MW: $ $86Miles frommidpoint:Total Costs:= $426
55Proof by Contradiction Alternative Point44 customers20 customersCustomers:MW=wo*to:Sum of MW: $ $40Miles frommidpoint:Total Costs:= $428
57Other Input Cost Orientations Other types of costs may matter more to firms. These include:Labor OrientationAmenity OrientationEnergy OrientationLand OrientationExternal Economy OrientationFiscal Orientation
58Graphical depictionSuppose that one location has lower labor costs than another.e.g., South has more right to work laws, and lower unionization rates.We can adapt our most simple model.Look at balancing of labor and transport costs.Assume one kind of transport costs.Assume labor costs decline with distance.
59Labor Oriented Firm Cost min. Labor Costs Distribution Costs Transport+Labor Costs Transport+Labor CostsCostmin.Labor CostsMinimumLaborCostsDistributionCostsM Low cost Labor
60Two types of Orientations What have we observed over time?Transport costs have continually declined.Reasons:Lighter materialsMore efficient transport modesContainer systems on shipsDeregulation of truckingDevelopment of interstate highway systemInternationalization of markets generating other input cost differentials.
61Next time - Look at Firm Location and Household Location Decisions Bartik – Clark will do this oneLeichenkoHousehold LocationClark and HunterBroad Regional TrendsChinitz