A Dynamic Model of Urban Composition and Growth

Description

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.

Background information

In October 1999, Money Magazine rated San Francisco as the best city in which to live in the United States. A few years earlier, Places Rated Almanac gave that distinction to Pittsburgh, a city once known for its aging steel industry and poor air quality. Analogous rankings have also been published on the best places to do business. In May 2000, Forbes ranked Austin, Texas as the city with the best business environment in the United States, while Syracuse, New York was ranked far behind, at 172.

Do these rankings suggest that households and firms favour different cities? If so, what are the implications for the growth and character of individual metropolitan areas? Moreover, given the ad hoc nature of popular rankings of urban areas, to what extent can economic theory be used to develop more reliable and more easily interpretable city rankings?

Methodology

This paper seeks to examine the above described issues by drawing on two seemingly disparate literatures that are in fact closely linked; the literature on urban quality of life and the literature on the migration decisions of retirees.

Conclusions

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 labour 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.

Contact info

Department of Finance and Business Economics and Lusk Centre for Real Estate - Marshall School of Business and School of Policy, Planning and Development, University of Southern California
Stuart A. Gabriel

Project finished

1/10/2000

Researcher

Stuart A. Gabriel and Stuart S. Rosenthal

Document type

research