Firm Behavior ______ PA 8202

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Firm Behavior______PA 8202
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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?

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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

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Firm Behavior in a Broader Context
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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

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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

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Industrial Location Theory
Manufacturing Process Transportation Costs Location Decision


Assemblage greater than Distribution
Weight-Losing
Material Source
Distribution greater than Assemblage
Weight-Gaining
Market
Not just weight also Bulk, Fragility,
Perishability
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Models of firm, employment, and developer
location decisionsmore than price and access
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Classic models of land economics
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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
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• (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)

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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

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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)

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A Network Analysis of the Urban Economy
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A NETWORK ANALYSIS OF THE ECONOMY
Government?
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A Network Model of the Economy
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Political fragmentation and government
expenditures - TAXES -
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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
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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.
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• Public service consumers
• choose their maximizing tax service package

Public service producers try to optimize
community size.
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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?

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Does this relate to land use-transportation?

• Ifcross municipality competition would meet the
  demands of consumers for different types of
  neighborhoods with different types of public
  services
• Thenwhy 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?

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Taxes, Highways, Rail, Other?
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Residential Opportunities--Jobs-Housing Balance
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Firm Location

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

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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
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Macroeconomic Labor-Real Estate Markets
Three Sector Model
Output Market
Real Estate Market
Labor Market
?LQ Ld
P
?KQ Kd
r
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.
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Demand-Induced Regional Growth
Output Market
Labor Market
Real Estate Market
P
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r
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w/p
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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.
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Supply-Induced Regional Growth
Output Market
Labor Market
Real Estate Market
?LQ0
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P
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r
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w/p
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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.
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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