Firm Behavior______

PA 8202

Overview

• Previous work– Generalized theories

• Applicability to land use-transportation issues at metropolitan scale

• Ten Factors– Role of government– A network analysis

• Specifics– 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 ContextGovernments Infrastructure

Land

FloorspaceHousing

Households BusinessesLabor

Services

Developers

Flow of consumption from supplier to consumer

Regulation or Pricing

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

ManufacturingProcess

TransportationCosts

Location Decision

Weight-LosingWeight-Losing

Weight-GainingWeight-Gaining

Assemblage greater thanDistributionDistribution greater thanAssemblage

Material Source

Market

Not just weight: also Bulk, Fragility, Perishability

Industrial Location Theory

Models of firm, employment, and developer location decisions

…more than price and access

“Classic” models of land economics

Subcenter Formation, Rents and Wages

CBD

LandRent

Subcenter

rc

ra ra

rcr(d)

r(d)

d7 d6 d0 d1 d5 d2 d3 d4

Commuting patterns:

distance (d)

(1) Transportation-Orientation: (1) Transportation-Orientation: High weight (bulk)-to-High weight (bulk)-to-value ratio or transhipment advantagesvalue ratio or transhipment advantages • Heavy Manufacturing• Global Sourcing (airports; JIT)

(3) Minimal Transportation-Orientation:(3) Minimal Transportation-Orientation: FootlooseOther factor inputs (Labor, Comparative Shopping)• Labor-Oriented• Communications Orientation • Comparative Shopping Orientation • Tele-communities (information brokering)• Flexible Specialization (non-standardized craft manufacturing)

(2) Weakening-Transportation-Orientation: (2) Weakening-Transportation-Orientation: Technology (containizeration), JIT & Light Goods (miniaturization, polymers, robotics)

Post-Industrialization:Post-Industrialization: Why are firms moving to

suburbs, exurbs, & beyond?

PUSH - PUSH - Cities 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

PULL - PULL - Sub-/Ex-urbs have: • 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• 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

Firm CustomersSuppliers

Competitors

Complements Regulation,Customs,Culture

Government?

A Network Model of the Economy

Agent 3,1,1

Agent 2,1,2

Agent 3,1,2

Agent 3,1,3

money

goods

Input Market 1

Input Market 2

Input Market 3

Output Market1

Agent 1,1,1

Agent 1,1,2

Agent 1,1,3

Agent 2,1,1

Output Market2

STAGE 1 STAGE 2 STAGE 3

Agent 1,2,1

Agent 3,2,1

Agent 1,2,2

Agent 1,2,3

Agent 1,3,1

Agent 1,3,2

Agent 1,3,3

Agent 3,2,2

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 use-transportation?

• 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?

Residential Opportunities

--Jobs-Housing

BalanceScenario B

Scenario A

100Jobs

100Workers

50 Jobs50 Workers

50 Jobs50 Workers

Firm Location

• Making sense of models?• Developers vs. Locators• Relationship to individual behavior• Role of networks• Other

Subcenter Agglomeration and Commuting Costs

Subcenter Size‘Optimal’ Size

AgglomerationCosts (A)

Wages (w)

Total (w + A)

ProductionCosts

What would be the effects of:1) Telecommunications increases2) Higher commuting costs (congestion delay)

Macroeconomic Labor-Real Estate Markets

OutputMarket Labor

MarketReal EstateMarket

P

Q

Qd

Kr + Lw = C

LQ = Ld KQ = Kd

L K

w/p r

Ls Ks

Price elasticity of demand for totalregional output depends on degreeof competitiveness in national andinternational markets.

Production of output requires fixedproportions of labor and real estate.

Labor demand is inelastic, since factorProportions are fixed. Depends only onoutput 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) thatInduces real estate supply.

Three markets must be in equilib-rium for economy to be stable.

Three Sector Model

Demand-Induced Regional Growth

OutputMarket

LaborMarket

Real EstateMarket

P

Q

Qd

C0=Kr0+Lw0

LQ0 KQ0

L K

w/p r

Ls Ks

Growth in demand for output raisesprices, rents, wages, output, stockof real estate, and employment.

Increase in output demanded at initialprices creates higher rents and wages,and therefore higher output prices, sodemand is tempered by higher prices.

More elastic supply functions for laborand real estate mean that the increasein demand translates larger increases inquantities (output, real estate, and labor),and smaller increases in prices, wages or rents.

C’=Kr’+Lw’

LQ’

Q’d

KQ’

L’L0 K’K0Q’Q0 Q’’

P0

P’

w0/p0

w’/p’r0

r’

Supply-Induced Regional GrowthOutputMarket

LaborMarket

Real EstateMarket

P

Q

Qd

C0=Kr0+Lw0

LQ0KQ0

L K

w/p r

L’s

Ks

Growth in labor supply causes wagesand output prices to fall, and outputand employment to increase. The %drop in wages must exceed that ofprices. The stock of real estate andrents must increase.

Initial increase in labor supply inducedBy inmigration (not by higher wages).

Elastic output demand generates largerincreases in output and employment, smaller declines in wages and prices.

C’=Kr’+Lw’

LQ’KQ’

L’L0 K’K0Q’Q0

P0

P’

w0/p0

w’/p’

r0

r’

Ls

Implications of Economic Submarkets• 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