Thick Market Effect Research Articles

The demography of the great migration in China

Fertility differentials across countries drive global migration. Despite a vibrant research agenda on the demographic forces behind international migration, little empirical research probes into the demography of internal migration. We analyze the demography of China’s internal migration from 1996–2010. Specifically, we construct bilateral migration flows across Chinese prefectures and exploit large variations in cohort sizes induced by historical events. We find asymmetric impacts of “push” and “pull” demographic factors in determining internal migration. We also explore economic mechanisms behind demographic forces, such as the moderating effects of physical distance and social network, the substitution pattern by education, and a thick-market effect for marriage migration.

Entrepreneurs meet financiers: Evidence from the business angel market

This paper formalizes and estimates the process of search and matching between entrepreneurs and financiers in the business angel (BA) market. Our theoretical model describes the market for entrepreneurial finance as a fair in which the two sides of the market can meet bilaterally and transform a rough entrepreneurial idea into a real start-up firm. We then collect a new dataset from the BA markets of 17 developed countries for the period 1996–2014, and we estimate the aggregate matching function expressing the number of deals as a function of the number of submitted entrepreneurial projects and of business angels. Empirical findings confirm the technological features assumed in the theoretical literature: positive and decreasing marginal returns to both inputs (stepping on toes effect), technological complementarity across the two inputs (thick market effect) and constant returns to scale. We discuss the theoretical and policy implications of these findings.

Market thickness and the impact of unemployment on housing market outcomes

A search-and-matching model is developed to study how unemployment influences the housing market in the presence of the thick-market effect. A structural estimation of the model is conducted based on Texas city-level data that covers three years—1990, 2000 and 2010. Simulations help clarify how much the thick-market effect amplifies the impact of unemployment. A three-percentage-point increase in the unemployment rate lowers the price by 10.74% and reduces the transaction volume by 5.49%. Incorporating a feedback mechanism from housing prices to unemployment strengthens the amplification magnitude of the thick-market effect.

What Account for the Differences in Rent-Price Ratio and Turnover Rate? A Search-and-Matching Approach

We build an on-the-house-search model and show analytically that the rent-to-price ratio (or rental yield) and turnover rate, which are frequently used metrics for the housing market, are jointly determined in equilibrium. We therefore adopt a simultaneous equation approach on matched sale-rental pairs in our empirical investigation, as a housing unit cannot be owner-occupied and renter-occupied at the same time. Our empirical results confirm a higher turnover rate is associated with a lower rent-to-price ratio, as predicted by the model. Furthermore, our results suggest a form of “dichotomy” in the empirical determinants of rental yield and turnover at the real-estate-development (RED) level: the demographic structure, and past return performance affect its turnover rate, while popularity, human capital environment, mortgage burden, and long run rent growth determine the rental yield. No evidence of “thick market effect” is found. The robustness of our results are established through a series of tests. In addition to these findings, our tractable search-theoretic model, a ranking of more than 130 RED in Hong Kong based on the popularity index we construct, and the estimated brand-premium for different major real estate developers may also carry independent research and practical interests.

What Account for the Differences in Rent-Price Ratio and Turnover Rate? A Search-and-Matching Approach

We build an on-the-house-search model and show analytically that the rent-to-price ratio (or rental yield) and turnover rate, which are frequently used metrics for the housing market, are jointly determined in equilibrium. We therefore adopt a simultaneous equation approach on matched sale-rental pairs in our empirical investigation, as a housing unit cannot be owner-occupied and renter-occupied at the same time. Our empirical results confirm a higher turnover rate is associated with a lower rent-to-price ratio, as predicted by the model. Furthermore, our results suggest a form of “dichotomy” in the empirical determinants of rental yield and turnover at the real-estate-development (RED) level: the demographic structure, and past return performance affect its turnover rate, while popularity, human capital environment, mortgage burden, and long run rent growth determine the rental yield. No evidence of “thick market effect” is found. The robustness of our results are established through a series of tests. In addition to these findings, our tractable search-theoretic model, a ranking of more than 130 RED in Hong Kong based on the popularity index we construct, and the estimated brand-premium for different major real estate developers may also carry independent research and practical interests.

Thick-market Effects, Housing Heterogeneity, and the Determinants of Transaction Seasonality

This article uses cross‐sectional variation in transaction seasonality and a search‐theoretic framework to develop a test for thick‐market effects from matching efficiency. The test relates the extent of transaction seasonality to the degree of horizontal housing heterogeneity. We find a strong positive association between measures of seasonality and housing heterogeneity using a transaction level dataset for Norway, which is consistent with the presence of thick‐market effects. These results also show that the degree of horizontal heterogeneity of the housing stock is an important determinant of the extent of seasonality in a housing market.

Market Thickness and the Impact of Unemployment on Housing Market Outcomes

This paper develops a search-matching model to study the impact of the unemployment rate on the housing market in the presence of the thick market effect. We estimate the structural model using Texas city-level data that covers three years, 1990, 2000 and 2010. Our structural estimation helps identify the channel through which the thick market effect amplifies the impact of the unemployment rate on housing market outcomes. Specifically, we show that an increase in the unemployment generates a thinner market, which leads to poorer matching quality on average. As a consequence, prices and the transaction volume both decline more than in the absence of the thick market effect. Simulations based on our estimates predict that a three percentage-point increase in the unemployment rate lowers the price by 7.74% and reduces the transaction volume by 9.98%. In addition, larger cities with more population experience milder changes in prices in response to changes in the unemployment rate compared to smaller cities.Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at www.nber.org.

Hot and Cold Seasons in the Housing Market

Every year housing markets in the United Kingdom and the United States experience systematic above-trend increases in prices and transactions during the spring and summer (“hot season”) and below-trend falls during the autumn and winter (“cold season”). House price seasonality poses a challenge to existing housing models. We propose a search-and-matching model with thick-market effects. In thick markets, the quality of matches increases, rising buyers' willingness to pay and sellers' desire to transact. A small, deterministic driver of seasonality can be amplified and revealed as deterministic seasonality in transactions and prices, quantitatively mimicking seasonal fluctuations in UK and US markets. (JEL C78, R21, R31)

Thick-market effects and churning in the labor market: Evidence from US cities

Workers change occupation and industry less often in more densely populated areas, a relationship that had not been previously reported. This reduced-form result is robust to standard demographic controls, as well as to including aggregate measures of human capital and sectoral mix. Analysis of displaced worker surveys shows that this relationship is present in cases of involuntary separation as well. In contrast, we actually find the opposite result (higher rates of occupational and industrial switching) for the subsample of younger workers. These results provide evidence consistent with increasing-returns-to-scale matching in labor markets. Results from a back-of-the-envelope calibration suggest that this mechanism has an important role in raising both wages and returns to experience in denser areas.

Rethinking Economic Growth in a Globalizing World: An Economic Geography Lens*

Abstract: This paper argues that cumulative causation processes are fundamental to understanding growth and development. Such processes derive from spatially concentrated increasing returns to scale including thick market effects, knowledge spillovers, sectoral and urban clustering, and self‐reinforcing improvements in physical and social infrastructure. These sources of agglomeration have been extensively analyzed in the economic geography literature. They imply that spatial unevenness in economic activity and incomes is an equilibrium outcome. Growth tends to be ‘lumpy’, with some sectors in some countries growing fast while other countries lag. The policy challenge is to lift potential new centers of economic activity to the point where they can reap the productivity and investment climate advantages of increasing returns and cumulative causation.

Thick-Market Effects and Churning in the Labor Market: Evidence from U.S. Cities

Using U.S. Census microdata, the authors show that, on average, workers change occupation and industry less in more densely populated areas. The result is robust to standard demographic controls, as well as to including aggregate measures of human capital and sectoral mix. Analysis of the displaced worker surveys shows that this effect is present in cases of involuntary separation as well. On the other hand, the authors actually find the opposite result (higher rates of occupational and industrial switching) for the subsample of younger workers. These results provide evidence in favor of increasing-returns-to-scale matching in labor markets. Results from a back-of-the-envelope calibration suggest that this mechanism has an important role in raising both wages and returns to experience in denser areas.

Agglomeration, opportunism, and the organization of production

Recent economic analysis of outsourcing has emphasized its international dimension. In contrast, this paper focuses on local outsourcing. The paper specifies and solves a model where the organization of production (vertically integrated or not) and the location of production (agglomerated or not) are jointly determined. The paper shows that agglomeration reduces opportunism, a thick market effect, and so serves as a substitute for integration. This force will lead firms to agglomerate. The paper also shows that the normative properties of equilibrium with local outsourcing are not as clear cut as for international outsourcing. Since local agglomeration is achieved at the cost of congestion, local markets may be too thick, which would not be the case for an increase in the thickness of a world market. Finally, the many changes in economic and social circumstance that have been labeled “globalization” do not impact only vertically integrated firms. They also impact cities and industry clusters to the extent that agglomeration is a substitute for vertical integration.

A micro-foundation of local business cycles

Cyclical fluctuations in unemployment vary widely across cities in the United States. It is puzzling that after controlling for the industry composition effect, one can still find significant cyclical heterogeneity. This paper demonstrates how the temporal agglomeration externality due to the thick market effect, combined with idiosyncratic shocks across local firms, generates local business cycles. The paper formalizes the idea of a city as existing to facilitate matching between specialized inputs and firms in a fully dynamic framework; specifically, a sequence of multi-object auctions is used to model trading in the local market. The timing of auctions is endogenously determined. The paper shows that the size of the local economy is an important factor contributing to variations in patterns of cyclical fluctuations across cities.

Odds-setting efficiency in gambling markets: Evidence from the PGA TOUR

This paper describes the gambling market for PGA TOUR events for the 2002 season. The extent to which the odds predict the outcome is examined, illustrating how much information is captured in the odds and whether there are any identifiable biases in the odds. The overall implied profit to the casino is calculated as well as the returns to several naive betting strategies. By splitting the sample based on whether or not Tiger Woods is in the tournament, a “Tiger Woods effect” or a “thin market versus thick market effect” can be examined. On the whole, efficient markets propositions hold up, but the overwhelming share of the variation in the tournament outcome remains unexplained.

The thick market effect on local unemployment rate fluctuations

This paper studies how the thick market effect influences local unemployment rate fluctuations. The paper presents a model to demonstrate that the average matching quality improves as the number of workers and firms increases. Unemployed workers accumulate in a city until the local labor market reaches a critical minimum size, which leads to cyclical fluctuations in the local unemployment rate. Since larger cities attain the critical market size more frequently, they have shorter unemployment cycles, lower peak unemployment rates and lower mean unemployment rates. Our empirical tests are consistent with the predictions of the model. In particular, we find that an increase of two standard deviations in city size shortens the unemployment cycles by about 0.72 months, lowers the peak unemployment rate by 0.33 percentage points, and lowers the mean unemployment rate by 0.16 percentage points.

The Thick Market Effect on Local Unemployment Rate Fluctuations

This paper develops a model to study how the thick market effect influences local unemployment rate fluctuations. The model demonstrates that the average matching quality improves as the number of workers and firms increases. Unemployed workers accumulate in a city until the local labor market reaches a critical minimum size, which leads to cyclical fluctuations in the local unemployment rate. Since larger cities attain the critical market size more frequently, they have lower unemployment rates, shorter unemployment cycles and lower peak unemployment rates. Our empirical tests are consistent with the predictions of the model. In particular, we find that an increase of two standard deviations in city size lowers the unemployment rate by 0.7 percentage points, decreases the peak unemployment rate by 0.3 percentage points, and shortens the unemployment cycles by about 0.7 months.

Microfoundations of Local Business Cycles

Cyclical fluctuations in unemployment vary widely across cities in the United States. It is puzzling that after controlling for the industry composition effect, people can still find significant cyclical heterogeneity. This paper demonstrates how market friction, combined with idiosyncratic shocks across local firms, generates local business cycles. It formalizes the idea of a city as existing to facilitate matching between specialized inputs and firms; specifically, it uses a sequence of multi-object auctions to model tradings in the local market. It shows that due to the thick market effect, the size of the local economy is an important factor contributing to variations in patterns of cyclical fluctuations across cities.

Interpreting the procyclical productivity of manufacturing sectors: can we really rule out external effects?

Recent empirical contributions on procyclical productivity have focused on the dynamic implications of persistent aggregate fluctuations on sectoral productivity. Given a permanent innovation in aggregate output, unobserved variations of labour (or capital) utilization may have only a transitory effect on measured productivity, whereas external effects should produce permanent effects. It is found that persistent aggregate fluctuations have a permanent effect on productivity of four-digit US manufacturing industries. While a number of alternative explanations of this evidence are discussed and ruled out, the findings are consistent with a simple model with external or thick market effects.