Estimating Firms' Demand for Agglomeration

Tinbergen Institute Discussion Paper No. 10-087/3

32 Pages Posted: 31 Aug 2010

See all articles by Hans Koster

Hans Koster

VU University Amsterdam - Department of Spatial Economics

Jos van Ommeren

Tinbergen Institute; Vrije Universiteit Brussel (VUB)

Piet Rietveld

VU University Amsterdam - Department of Spatial Economics (Deceased)

Date Written: August 26, 2010

Abstract

The market for commercial properties is characterised by extreme heterogeneity in demand. In this paper, we aim to gain more insight in the heterogeneity in demand for employment agglomeration and size of the rental property using a two-stage hedonic approach following Bajari and Benkard (2005). We use unique micro-data of properties' attributes as well as of firm characteristics. Given assumptions on the functional form of the production function, we identify firm-specific parameters using a nonparametric control function approach that corrects for endogeneity. The results show that agglomeration benefits are capitalised in rents: a one standard deviation increase in agglomeration leads to an increase in the annual rents of about 6 percent. It is found that larger and business services firms are willing to pay (substantially) more for agglomeration. Furthermore, for office buildings a 10 percent increase in number of employees increases the marginal willingness to pay for floor space with 8 percent, which suggests that internal returns to scale are present.

Keywords: Demand Estimation, Nonparametric Estimation, Hedonics, Commercial Properties

JEL Classification: C14, L1

Suggested Citation

Koster, Hans and van Ommeren, Jos and van Ommeren, Jos and Rietveld, Piet, Estimating Firms' Demand for Agglomeration (August 26, 2010). Tinbergen Institute Discussion Paper No. 10-087/3, Available at SSRN: https://ssrn.com/abstract=1669291 or http://dx.doi.org/10.2139/ssrn.1669291

Hans Koster (Contact Author)

VU University Amsterdam - Department of Spatial Economics ( email )

De Boelelaan 1105
1081HV Amsterdam
Netherlands

Jos Van Ommeren

Tinbergen Institute ( email )

Gustav Mahlerplein 117
Amsterdam, 1082 MS
Netherlands

Vrije Universiteit Brussel (VUB) ( email )

Pleinlaan 2
http://www.vub.ac.be/
Brussels, 1050
Belgium

Piet Rietveld

VU University Amsterdam - Department of Spatial Economics (Deceased)

De Boelelaan 1105
1081HV Amsterdam
Netherlands
+31 20 4446097 (Phone)
+31 20 4446004 (Fax)

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