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Firm Behavior ______ PA 8202

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

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Firm Behavior ______ PA 8202

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  1. Firm Behavior______PA 8202

  2. 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?

  3. 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

  4. Firm Behavior in a Broader Context

  5. 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

  6. 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

  7. Industrial Location Theory Assemblage greater than Distribution Weight-Losing Material Source Distribution greater than Assemblage Weight-Gaining Market Not just weight: also Bulk, Fragility, Perishability

  8. Models of firm, employment, and developer location decisions…more than price and access

  9. “Classic” models of land economics

  10. Subcenter Formation, Rents and Wages Land Rent rc Subcenter r(d) rc CBD r(d) ra ra d7 d6 d0 d1 d5 d2 d3 d4 distance (d) Commuting patterns:

  11. (1) Transportation-Orientation: High weight (bulk)-to-value 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)

  12. Post-Industrialization: Why are firms moving to suburbs, exurbs, & beyond? • 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 - 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

  13. 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)

  14. A Network Analysis of the Urban Economy

  15. A NETWORK ANALYSIS OF THE ECONOMY Government?

  16. A Network Model of the Economy

  17. Political fragmentation and government expenditures - TAXES -

  18. 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

  19. 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.

  20. Public service consumers …choose their maximizing tax service package Public service producers …try to optimize community size.

  21. 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?

  22. 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?

  23. Taxes, Highways, Rail, Other?

  24. Residential Opportunities--Jobs-Housing Balance

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

  26. Subcenter Agglomeration and Commuting Costs • What would be the effects of: • Telecommunications increases • Higher commuting costs (congestion delay) Production Costs Total (w + A) Wages (w) Agglomeration Costs (A) Subcenter Size ‘Optimal’ Size

  27. Macroeconomic Labor-Real Estate Markets Three Sector Model Output Market Real Estate Market Labor Market LQ = Ld P r KQ = Kd w/p Ls Ks Kr + Lw = C Qd Q L K 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 equilib- rium for economy to be stable.

  28. Demand-Induced Regional Growth Output Market Labor Market Real Estate Market P LQ0 LQ’ r KQ0 KQ’ w/p Ls Ks C’=Kr’+Lw’ P’ C0=Kr0+Lw0 r’ P0 w’/p’ w0/p0 r0 Q’d Qd Q0 Q’ Q’’ Q L0 L’ L K0 K’ K 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. 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.

  29. Supply-Induced Regional Growth Output Market Labor Market Real Estate Market LQ0 LQ’ P r KQ0 KQ’ w/p Ls Ks C0=Kr0+Lw0 P0 L’s w’/p’ C’=Kr’+Lw’ r’ P’ r0 w0/p0 Qd Q0 Q’ Q L0 L’ L K0 K’ K 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. 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.

  30. 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

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