Urban Firm Location: Comparative Statics and Empirical Evidence

Abstract

Economists and policymakers are convinced that the problems of the older central cities are intertwined with the changing patterns of industrial location within urban areas. However, we do not have a generally accepted framework within which the locational decision of an urban firm can be analyzed. This study demonstrates that a long-run partial equilibrium analysis of the urban firm's location choice provides a framework within which changing location patterns can be studied. The objective of this study is to develop and test a simple model of the urban firm's locational choice. A cost minimization model is developed for a firm locating in a circular city on a featureless plain. The rent (land price) gradient is assumed to decrease at a decreasing rate but various assumptions are made about the slopes of wage and transportation cost gradients. Comparative-static results demonstrate that each of the five relevant variations of the model has the same qualitative properties; consequently, for many purposes a choice of a particular set of assumptions is not critical. Tests of the model are performed using both individual firm data and firm data aggregated over both industries and geographical areas. In Section II the model and its variations are developed and in Section III geometric analyses are presented. Section IV presents empirical results and Section V discusses firm decentralization. Section VI concludes the paper.