They characterize the stationary distribution of firms that arises in equilibrium. They estimate the parameters of the model using a method of moments estimator. Using unique panel data collected by Dun and Bradstreet, the authors find that their model fits the moments used in estimation as well as a set of moments that the authors use for model validation. Agglomeration externalities increase the productivity of firms by about 8 percent. Economic policies that subsidize firm relocations to the central business district increase agglomeration externalities in that area. They also increase economic welfare in the urban economy.
Estimating a Dynamic Equilibrium Model of Firm Location Choices in an Urban Economy
WP 12-26 - The authors develop a new dynamic general equilibrium model to explain firm entry, exit, and relocation decisions in an urban economy with multiple locations and agglomeration externalities.