Estimating a Dynamic Equilibrium Model of Firm Location Choices in an Urban Economy

55 Pages Posted: 14 Dec 2012

See all articles by Jeffrey Brinkman

Jeffrey Brinkman

Federal Reserve Banks - Federal Reserve Bank of Philadelphia

Daniele Coen-Pirani

Carnegie Mellon University - David A. Tepper School of Business

Holger Sieg

University of Pennsylvania - Department of Economics; National Bureau of Economic Research (NBER)

Date Written: October 12, 2012

Abstract

We develop a new dynamic general equilibrium model to explain firm entry, exit, and relocation decisions in an urban economy with multiple locations and agglomeration externalities. We characterize the stationary distribution of firms that arises in equilibrium. We estimate the parameters of the model using a method of moments estimator. Using unique panel data collected by Dun and Bradstreet, we find that our model fits the moments used in estimation as well as a set of moments that we use for model validation. Agglomeration externalities increase the productivity of firms by about 8 percent. Economic policies that subsidize firm relocations to the central business district increase agglomeration externalities in that area. They also increase economic welfare in the urban economy.

Keywords: Agglomeration Externalities, Firm Dynamics, Firm Sorting, Urban Economy, General Equilibrium, Estimation, Empirical Analysis

JEL Classification: R30, R13, L11, C51

Suggested Citation

Brinkman, Jeffrey and Coen-Pirani, Daniele and Sieg, Holger, Estimating a Dynamic Equilibrium Model of Firm Location Choices in an Urban Economy (October 12, 2012). FRB of Philadelphia Working Paper No. 12-26. Available at SSRN: https://ssrn.com/abstract=2167288 or http://dx.doi.org/10.2139/ssrn.2167288

Jeffrey Brinkman (Contact Author)

Federal Reserve Banks - Federal Reserve Bank of Philadelphia ( email )

Ten Independence Mall
Philadelphia, PA 19106-1574
United States

Daniele Coen-Pirani

Carnegie Mellon University - David A. Tepper School of Business ( email )

5000 Forbes Avenue
Pittsburgh, PA 15213-3890
United States

Holger Sieg

University of Pennsylvania - Department of Economics ( email )

Ronald O. Perelman Center for Political Science
133 South 36th Street
Philadelphia, PA 19104-6297
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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