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Firm Behavior
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PA 8202
• Previous work
– Generalized theories
Overview
• Applicability to land usetransportation issues at
metropolitan scale
• Ten Factors
– Role of government
– A network analysis
• Specifics
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Jobs-housing
Taxes
Rail
Other?
Theories of economic activity
• Complex
• Generalizations
• Case specific
• Think of your favorite business, employment
center, or development opportunity (old or new).
Identify:
– Where?
– 2 principle factors of that location
Firm Behavior in a Broader Context
Firm Location Timeline
• In 19th century, manufacturing facilities, shops and offices  located
in the CBD
• Manufacturing first to decentralize
– Transportation technology: shipping to rail, to highway
– Production and storage technology: more land intensive
– Result is decentralized pattern focused on rail and highway access
• Office sector (financial, business services, etc)
– Slower to decentralize
– Recent formation of suburban centers: Edge Cities
– Transportation of labor most important cost
– Agglomeration economies are important: face to face transactions
• Retail sector
– Suburbanized with shopping malls on circumferential highways
– Subject to competition and to agglomeration effects
Factors Influencing Metropolitan
Economies
• Economic globalization
– Greater international competition
– Free trade
– Global capital markets
– Shift of US manufacturing overseas
• Technological change
– Information processing
– Telecommunications
• Economic restructuring
– Overall shift from goods-producing sector
– Increases in services and information sectors
– Loss of middle-wage, moderate skill manufacturing jobs
– Gain in jobs bimodal: high-skill/wage and low skill/wage
– Economic restructuring has geographic impacts
Industrial Location Theory
Manufacturing
Process
Weight-Losing
Weight-Gaining
Transportation
Costs
Assemblage
greater than
Distribution
Distribution
greater than
Assemblage
Not just weight: also Bulk, Fragility, Perishability
Location Decision
Material Source
Market
Models of firm, employment, and
developer location decisions
…more than price and access
“Classic” models of land economics
Subcenter Formation, Rents and Wages
Land
Rent
rc
Subcenter
r(d)
rc
CBD
r(d)
ra
ra
d7
d6
d0 d1
d5
Commuting patterns:
d2
d3
d4
distance (d)
(1) Transportation-Orientation: High weight (bulk)-tovalue ratio or transhipment advantages
• Heavy Manufacturing
• Global Sourcing (airports; JIT)
(2) Weakening-Transportation-Orientation:
Technology (containizeration), JIT & Light Goods
(miniaturization, polymers, robotics)
(3) Minimal Transportation-Orientation: Footloose
Other factor inputs (Labor, Comparative Shopping)
• Labor-Oriented
• Communications Orientation
• Comparative Shopping Orientation
• Tele-communities (information brokering)
• Flexible Specialization (non-standardized craft manufacturing)
Post-Industrialization:
Why are firms moving to
suburbs, exurbs, & beyond?
PUSH - Cities have:
PULL - Sub-/Ex-urbs have:
• Higher Taxes
• Higher Rents
• Stronger Unions
• Higher Crime Rate
• Poorer School Performance
• Poorer Airport Access
• Less accessibility to
desired work forces
• Complex and bureaucratic
procedures
• Lower Taxes
• Lower Rents
• Weaker Unions
• Lower Crime Rate
• Better School Performance
• Better Airport Access
• Better accessibility to
desired work forces
• Easier paperwork
Investment Decisions of Developers
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Market velocity (how active is the specified market?)
Price
Financing
Hard infrastructure (capabilities related to road, water,
sewer)
Access choices (intersections, frequency of existing transit
services, parking)
Human infrastructure (education of workforce, nearby
school quality, housing, day care)
Physical character (quality surrounding district, vitality,
views and vistas)
Environmental quality (healthy air and water)
Predictability (no dramatic changes in zoning or character,
appropriate capital improvement plan)
Amenities (parks, restaurants)
A Network Analysis of the Urban
Economy
A NETWORK ANALYSIS OF
THE ECONOMY
Complements
Suppliers
Firm
Competitors
Government?
Regulation,
Customs,
Cultur e
Customers
A Network Model of the
Economy
STAGE 1
STAGE 2
STAGE 3
Input Market 1
Agent 1,1,1
Agent 1,1,2
Agent 2,1,1
Agent 1,1,3
Agent 1,2,1
Output Market
1
Input Market 2
Agent 3,1,2
Agent 2,1,2
goods
Agent 1,2,2
Agent 3,1,1
Agent 3,1,3
Agent 1,2,3
Agent 1,3,1
Agent 3,2,1
money
Agent 1,3,2
Agent 1,3,3
Input Market 3
Agent 3,2,2
Output Market
Agent 3,2,3
Political fragmentation and
government expenditures
- TAXES -
Issue:
There remains no simple and uniquely optimal solution to
the problem of resource allocation in the public sector.
No decentralized pricing system can serve to optimally
determine levels of collective consumption. Some sort of
utopian voting or signaling would have to be tried.
--Musgrave & Samuelson
Ho: Competition among fragmented
local governments in a metropolitan
area allows consumers to reveal their
preferences by “voting with their
feet,” …and it subsequently forces
governments to cater to these
preferences.
Public service consumers
…choose their maximizing tax
service package
Public service producers
…try to optimize community size.
Questioning the underpinnings of the
Tiebout Hypothesis
• Are households (or businesses) fully mobile and
will they move to a community where their
patterns are best met?
• Do households behave as utility maximizing
consumers in an area-wide public service market?
• Do communities below the optimum size seek to
attract new residents to lower average costs?
• Can local governments can be viewed as firms
compelled to allocate public service resources
efficiently because of intra-urban competition for
residents?
Does this relate to land usetransportation?
• If…cross municipality competition would meet the
demands of consumers for different types of
neighborhoods with different types of public
services…
• Then…why would Tiebout competition not lend to
an efficient supply of desired neighborhood types,
and whether some kinds of neighborhoods tend to
be undersupplied in the outcome?
Taxes, Highways, Rail, Other?
Scenario A
100
Jobs
100
Workers
Scenario B
50 Jobs
50 Workers
50 Jobs
50 Workers
Residential
Opportunities
-Jobs-Housing
Balance
Firm Location
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Making sense of models?
Developers vs. Locators
Relationship to individual behavior
Role of networks
Other
Subcenter Agglomeration and Commuting Costs
Production
Costs
What would be the effects of:
1) Telecommunications increases
2) Higher commuting costs (congestion delay)
Total (w + A)
Wages (w)
Agglomeration
Costs (A)
‘Optimal’ Size
Subcenter Size
Macroeconomic Labor-Real
Estate Markets
Three Sector Model
P
Output
Market
w/p
Labor
Market
LQ = Ld
r
Real Estate
Market
KQ = Kd
Ls
Ks
L
K
Kr + Lw = C
Qd
Q
Price elasticity of demand for total
regional output depends on degree
of competitiveness in national and
international markets.
Production of output requires fixed
proportions of labor and real estate.
Labor demand is inelastic, since factor
Proportions are fixed. Depends only on
output level.
w/p is the effective wage (nominal wage /
cost of living) that determines labor supply.
Real estate demand also inelastic.
R is rent (structure and land) that
Induces real estate supply.
Three markets must be in equilibrium for economy to be stable.
Demand-Induced Regional
Growth
Output
Market
Labor
Market
P
Real Estate
Market
LQ0
w/p
LQ’
C0=Kr0+Lw0
P0
Q’d
Qd
Q0 Q’
Q’’
KQ0
KQ’
Ls
C’=Kr’+Lw’
P’
r
Q
Growth in demand for output raises
prices, rents, wages, output, stock
of real estate, and employment.
Increase in output demanded at initial
prices creates higher rents and wages,
and therefore higher output prices, so
demand is tempered by higher prices.
Ks
w’/p’
r’
w0/p0
r0
L0
L’
L
More elastic supply functions for labor
and real estate mean that the increase
in demand translates larger increases in
quantities (output, real estate, and labor),
and smaller increases in prices, wages or
rents.
K0
K’
K
Supply-Induced Regional Growth
Output
Market
Labor
Market
P
w/p
Real Estate
Market
LQ0
LQ’
r
Ls
KQ0
KQ’
Ks
C0=Kr0+Lw0
P0
L’s
w’/p’
C’=Kr’+Lw’
r’
P’
r0
Qd
Q0
Q’
Q
Growth in labor supply causes wages
and output prices to fall, and output
and employment to increase. The %
drop in wages must exceed that of
prices. The stock of real estate and
rents must increase.
w0/p0
L0
L’
L
Initial increase in labor supply induced
By inmigration (not by higher wages).
Elastic output demand generates larger
increases in output and employment,
smaller declines in wages and prices.
K0
K’
K
Implications of Economic Submarkets
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Divide the three-sector model into three linked submarkets:
– Information/technology (mostly exported): high wage jobs
– Manufactured goods (mostly exported): middle-wage jobs
– Low-skill services (locally consumed): low wage jobs
Assume:
– workers can shift between sectors, but moving up is harder (requires more
education)
– Growth in export-oriented sectors induces demand for local services
– Real estate markets represent quality submarkets
Consider the effects on wages, prices, rents, output, employment and real
estate of:
– a decline in demand for locally-produced manufactured goods
– An increase in demand for output from the information sector
– An increase in low-wage labor due to immigration
– A combination of these effects
– Geographic concentration of manufacturing and high-tech jobs