Quality of the Business Environment Versus Quality of Life in a Dynamic Model of Urban Composition and Growth Do Firms and Households Like the Same Cities?

Abstract

Appropriately constructed measures of the quality of life and the quality of the business environment should be important determinants of the growth and composition of population across urban areas. This paper examines that question by extending theoretical measures of household quality of life to construct the first ever measure of the quality of the business environment ? the value that firms place on the basket of amenities in a metropolitan area. An annual panel of quality of life and quality of business environment values for 37 cities in the United States is then constructed for the 1977 to 1995 period.

A key finding is that many cities attractive to firms are unattractive to households, and vice versa. In addition, estimates from an error correction model (ECM) indicate that improvements in the quality of the business environment and quality of life have strong positive effects on equilibrium city shares of workers, but negative effects on equilibrium city shares of retirees. The former result reflects outward shifts of labor supply and demand in response to improved amenities. The latter is because retirees avoid high land rents that arise from the in-migration of firms and workers. Moreover, following a shock that creates migratory pressures in the system of cities, worker-population shares converge back to long run equilibrium in 8-1/2 years, while retiree-population shares converge back in 6 years. The longer response time of the worker population likely reflects the cost of adjusting the spatial distribution of industry-specific human and physical capital in a coordinated manner.