An Approach for Empirical Work in Spatial Dynamics

53 Pages Posted: 4 May 2017

See all articles by Kyle Mangum

Kyle Mangum

Georgia State University - Department of Economics

Date Written: April 2017

Abstract

This paper illustrates how to incorporate forward-looking behavior into empirical spatial equilibrium models with locational heterogeneity. The main insight is that the standard spatial equilibrium already embeds a natural starting point for dynamics: the presence of spatial indifference conditions can dramatically simplify the state space of forward-looking agents. One needs to know how utility evolves with the variables in the system, but not every individual state, effectively side-stepping the curse of dimensionality. Standard numerical rational expectations methods can be applied to derive approximate solutions to the full dynamic specification. The paper uses an example model of landowners exercising real options in construction of housing to show how the approximation's errors are negligibly small, and importantly, much smaller than the differences between dynamic and myopic specifications of the same model.

Keywords: spatial equilibrium, spatial dynamics, rational expectations, housing supply

JEL Classification: R13, C63, D58, R31

Suggested Citation

Mangum, Kyle, An Approach for Empirical Work in Spatial Dynamics (April 2017). Andrew Young School of Policy Studies Research Paper Series No. 17-06. Available at SSRN: https://ssrn.com/abstract=2963217 or http://dx.doi.org/10.2139/ssrn.2963217

Kyle Mangum (Contact Author)

Georgia State University - Department of Economics ( email )

P.O. Box 3992
Atlanta, GA 30302-3992
United States

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