Handbook of Regional & Urban Economics – Volume 5

Recovery of causal relationships in data is an essential part of scholarly inquiry in the social sciences. This chapter discusses strategies that have been successfully used in urban and regional economics for recovering such causal relationships. Essential to any successful empirical inquiry is careful consideration of the sources of variation in the data that identify parameters of interest. Interpretation of such parameters should take into account the potential for their heterogeneity as a function of both observables and unobservables.

Structural estimation is a methodological approach in empirical economics explicitly based on economic theory, in which economic modeling, estimation, and empirical analysis are required to be internally consistent. This chapter illustrates the structural approach with three applications in urban economics: (1) discrete location choice, (2) fiscal competition and local public good provision, and (3) regional specialization. For each application, we first discuss broad methodological principles of model selection and development. Next we treat issues of identification and estimation. The finnal step of each discussion is how estimated structural models can be used for policy analysis.

This chapter is concerned with methods for analysing spatial data. After initial discussion on the nature of spatial data, including the concept of randomness, we focus most of our attention on linear regression models that involve interactions between agents across space. The introduction of spatial variables in to standard linear regression provides a ‡exible way of characteristing these interactions, but complicates both interpretation and estimation of parameters of interest. The estimation of these models leads to three fundamental challenges: the ‘re‡ection problem’, the presence of omitted variables and problems caused by sorting. We consider possible solutions to these problems, with a particular focus on restrictions on the nature of interactions. We show that similar assumptions are implicit in the empirical strategies – …xed effects or spatial differencing – used to address these problems in reduced form estimation. These general lessons carry over to the policy evaluation literature.

This chapter surveys recent developments in agglomeration theory within a unifying framework. We highlight how locational fundamentals, agglomeration economies, the spatial sorting of heterogeneous agents, and selection effects affect the size, productivity, composition, and inequality of cities, as well as their size distribution in the urban system.

We propose an integrated framework to discuss the empirical literature on the local determinants of agglomeration effects. We start by presenting the theoretical mechanisms that ground individual and aggregate empirical specifications. We gradually introduce static effects, dynamic effects, and workers’ endogenous location choices. We emphasise the impact of local density on productivity but we also consider many other local determinants supported by theory. Empirical issues are then addressed. Most important concerns are about endogeneity at the local and individual levels, the choice of a productivity measure between wage and TFP, and the roles of spatial scale, firms’ characteristics, and functional forms. Estimated impacts of local determinants of productivity, employment, and firms’ locations choices are surveyed for both developed and developing economies. We finally provide a discussion of attempts to identify and quantify specific agglomeration mechanisms.

This paper reviews academic research on the connections between agglomeration and innovation. We first describe the conceptual distinctions between invention and innovation. We then discuss how these factors are frequently measured in the data and note some resulting empirical regularities. Innovative activity tends to be more concentrated than industrial activity, and we discuss important findings from the literature about why this is so. We highlight the traits of cities (e.g., size, industrial diversity) that theoretical and empirical work link to innovation, and we discuss factors that help sustain these features (e.g., the localization of entrepreneurial finance).

This paper surveys recent literature examining the relationship between environmental amenities and urban growth. In this survey, we focus on the role of both exogenous attributes such as climate and coastal access as well as endogenous attributes such as local air pollution and green space. A city’s greenness is a function of both its natural beauty and is an emergent property of the types of households and firms that locate within its borders and the types of local and national regulations enacted by voters. We explore four main issues related to sustainability and environmental quality in cities. First, we introduce a household locational choice model to highlight the role that environmental amenities play in shaping where households locate within a city. We then analyze how ongoing suburbanization affects the carbon footprint of cities. Third, we explore how the system of cities is affected by urban environmental amenity dynamics and we explore the causes of these dynamics. Fourth, we review the recent literature on the private costs and benefits of investing in “green” buildings. Throughout this survey, we pay careful attention to empirical research approaches and highlight what are open research questions. While much of the literature focuses on cities in the developed world, we anticipate that similar issues will be of increased interest in developing nation’s cities.

We provide an integrated treatment of the theoretical literature on urban land use inspired by the monocentric model, including extensions that deal with multiple endogenous business centres, various dimensions of heterogeneity, and durable housing. After presenting the theory and distilling its key empirical implications, we critically review the empirical literature on differences in prices and development across urban locations, patterns of location choices of heterogeneous households in cities, sprawl and residential decentralization, and employment decentralization.

In this chapter, we provide an overview of research on neighborhoods and social networks and their role in shaping behavior and economic outcomes. We include discussion of empirical and theoretical analyses of the role of neighborhoods and social networks in crime, education and labor-market outcomes. In particular, we discuss in detail identification problems in peer, neighborhood and network effects and the policy implications of integrating the social and the geographical space, especially for ethnic minorities.

In this chapter we analyze immigration and its effect on urban and regional economies focusing on productivity and labor markets. While immigration policies are typically national, the effects of international migrants are often more easily identified on local economies. The reason is that their settlements are significantly concentrated across cities and regions, relative to natives. Immigrants are different from natives in several economically relevant skills. Their impact on the local economy depends on these skills. We emphasize that to evaluate correctly such impact we also need to understand and measure the local adjustments produced by the immigrant flow. Workers and firms take advantage of the opportunities brought by immigrants and respond to them trying to maximize their welfare. We present a common conceptual frame to organize our analysis of the local effects of immigration and we describe several applications. We then discuss the empirical literature that has tried to isolate and identify a causal impact of immigrants on the local economies and to estimate the different margins of response and the resulting outcomes for natives of different skill types. We finally survey promising recent avenues for advancing this research.

Housing markets experience substantial price volatility, short term price change momentum and mean reversion of prices over the long run. Together these features, particularly at their most extreme, produce the classic shape of an asset bubble. In this paper, we review the stylized facts of housing bubbles and discuss theories that can potentially explain events like the boom-bust cycles of the 2000s. One set of theories assumes rationality and uses idiosyncratic features of the housing market, such as intensive search and short selling constraints, to explain the stylized facts. Cheap credit provides a particularly common rationalization for price booms, but temporary periods of low interest rates will not explain massive price swings in simple rational models. An incorrectly under-priced default option can make rational bubbles more likely. Many non-rational explanations for real estate bubbles exist, but the most promising theories emphasize some form of trend-chasing, which in turn reflects boundedly rational learning.

In this chapter, we review and discuss the large body of research that has developed over the past 10-plus years that explores the interconnection of macroeconomics, finance, and housing. We focus on three major topics – housing and the business cycle, housing and portfolio choice, and housing and asset returns – and then review the recent literature that studies housing and the macroeconomy during the great housing boom and bust of 2000-2010. Our emphasis is on calibrated models that can be compared to data. In each section, we discuss the important questions, the typical set of tools used, and the insights that result from important papers. Although great progress has been made in understanding the important role that housing plays in understanding macroeconomic phenomena, work remains. For example, economists cannot fully explain all of the volatility in house prices during the unprecedented boom and bust period of 2000-2010. At the end of the chapter, we discuss a new literature that assesses the macroeconomic effects and welfare implications of housing policies.

This chapter surveys the literature on the microstructure of housing markets. It considers one-sided search, random matching, and directed search models. It also examines the bargaining that takes place once a match has occurred, with the bargaining taking various forms, including two-party negotiations of different types and multi-party housing auctions. The chapter reviews research on real estate brokers as intermediaries as well, focusing on the role of brokers in the matching and bargaining process, the nature of competition and entry in the brokerage industry, and the incentive issues that are present. The chapter also considers the inefficiencies that pervade the brokerage industry and the related policy debates. These are important issues both because of the inherent importance of housing and brokerage but also because of the importance of housing to macroeconomic dynamics.

Governments throughout the world intervene heavily in housing markets, and most have multiple policies to pursue multiple goals. This chapter deals with two of the largest types of housing policies in the United States, namely, low-income rental assistance and policies to promote homeownership through interventions in mortgage markets. We describe the rationales for the policies, the nature of the largest programs involved, the empirical evidence on their effects, and the data and methods used to obtain them. Because the U.S. government uses such a wide range of policies of these types, this evidence has lessons for housing policy in other countries.

This chapter considers the structure of mortgage finance in the U.S., and its role in shaping patterns of homeownership, the nature of the housing stock and the organization of residential activity. We start by providing some background on the design features of mortgage contracts that distinguish them from other loans, and that have important implications for issues presented in the rest of the chapter. We then explain how mortgage finance interacts with public policy, particularly tax policy, to influence a household’s decision to own or rent, and how shifts in the demand for owner-occupied housing are translated into housing prices and quantities, given the unusual nature of housing supply. We consider the distribution of mortgage credit in terms of access and price, by race, ethnicity, income and over the lifecycle, with particular attention to the role of recent innovations such as non-prime mortgage securitization and reverse mortgages. The extent of negative equity has been unprecedented in the past decade, and we discuss its impact on strategic default, housing turnover and housing investment. We describe spatial patterns in foreclosure and summarize the evidence for foreclosure spillovers in urban neighborhoods. Finally, we offer some thoughts on future innovations in mortgage finance.

This paper reviews recent literature that considers and explains the tendency for neighborhood and city-level economic status to rise and fall. A central message is that although many locations exhibit extreme persistence in economic status, change in economic status as measured by various indicators of per capita income is common. At the neighborhood level, we begin with a set of stylized facts, and then follow with discussion of static and dynamic drivers of neighborhood economic status. This is mirrored at the metropolitan level. Durable but slowly decaying housing, transportation infrastructure, and self-reinforcing spillovers, all influence local income dynamics, as do enduring natural advantages, amenities and government policy. Three recurring themes run throughout the paper: (i) Long sweeps of time are typically necessary to appreciate that change in economic status is common; (ii) history matters; and (iii) a combination of static and dynamic forces ensure that income dynamics can and do differ dramatically across locations but in ways that can be understood.

Most cities enjoy some autonomy over how they tax their residents, and that autonomy is typically exercised by multiple municipal governments within a given city. In this chapter, we document patterns of city-level taxation across countries, and we review the literature on a number of salient features affecting local tax setting in an urban context. Urban local governments on average raise some ten percent of total tax revenue in OECD countries and around half that share in non-OECD countries. We show that most cities are highly fragmented: urban areas with more than 500,000 inhabitants are divided into 74 local jurisdictions on average. The vast majority of these cities are characterized by a central municipality that strongly dominates the remaining jurisdictions in terms of population. These empirical regularities imply that an analysis of urban taxation needs to take account of three particular features: interdependence among tax-setting authorities(horizontally and vertically), jurisdictional size asymmetries, and the potential for agglomeration economies. We survey the relevant theoretical and empirical literatures, focusing in particular on models of asymmetric tax competition, of taxation and income sorting and of taxation in the presence of agglomeration rents.

Place-based policies commonly target underperforming areas, such as deteriorating downtown business districts and disadvantaged regions. Principal examples include enterprise zones, European Union Structural Funds, and industrial cluster policies. Place-based policies are rationalized by various hypotheses in urban and labor economics, such as agglomeration economies and spatial mismatch – hypotheses that entail market failures and often predict overlap between poor economic performance and disadvantaged residents. The evidence on enterprise zones is very mixed. We need to know more about what features of enterprise zone policies make them more effective or less effective, who gains and who loses from these policies, and how we can reconcile the existing findings. Some evidence points to positive benefits of infrastructure expenditure, and also investment in higher education and university research – likely because of the public-goods nature of these policies. However, to better guide policy, we need to know more about what policies create self-sustaining longer-run gains.

A wide array of local government regulations influences the amount, location, and shape of residential development. In this chapter, we review the literature on the causes and effects of this type of regulation. We begin with a discussion of how researchers measure regulation empirically, which highlights the variety of methods that are used to constrain development. Many theories have been developed to explain why regulation arises, including the role of homeowners in the local political process, the influence of historical density, and the fiscal and exclusionary motives for zoning. As for the effects of regulation, most studies have found substantial effects on the housing market. In particular, regulation appears to raise house prices, reduce construction, reduce the elasticity of housing supply, and alter urban form. Other research has found that regulation influences local labor markets and household sorting across communities. Finally, we discuss the welfare implications of regulation. Although some specific rules clearly mitigate negative externalities, the benefits of more general forms of regulation are very difficult to quantify. On balance, a few recent studies suggest that the overall efficiency losses from binding constraints on residential development could be quite large.

This paper surveys the theoretical and empirical literature on the relationship between the spatial distribution of economic activity and transportation costs. We develop a multi-region model of economic geography that we use to understand the general equilibrium implications of transportation infrastructure improvements within and between locations for wages, population, trade and industry composition. Guided by the predictions of this model, we review the empirical literature on the effects of transportation infrastructure improvements on economic development, paying particular attention to the use of exogenous sources of variation in the construction of transportation infrastructure. We examine evidence from different spatial scales, between and within cities. We outline a variety of areas for further research, including distinguishing reallocation from growth and dynamics.

This chapter surveys and synthesizes existing research on urbanization and housing in developing countries. The goal is to provide a unified overview of the principal urban issues that arise in developing countries, painting a coherent picture that can provide a starting point for policy analysis. The chapter covers empirical work on rural-urban migration, theoretical research on migration and city-size determination, theoretical and empirical work on tenure security and squatting, and the issue of housing affordability.

This chapter describes how the spatial distribution of economic activity changes as economies develop and grow. We start with the relation between development and rural-urban migration. Moving beyond the coarse rural-urban distinction, we then focus on the continuum of locations in an economy and describe how the patterns of convergence and divergence change with development As we discuss, these spatial dynamics often mask important differences across sectors. We then turn our attention to the right tail of the distribution, the urban sector. We analyze how the urban hierarchy has changed over time in developed countries and more recently in developing countries. The chapter reviews both the empirical evidence and the theoretical models that can account for what we observe in the data. When discussing the stylized facts on geography and development, we draw on empirical evidence from both the historical evolution of today’s developed economies and comparisons between today’s developed and developing economies.

We survey the literature on index crime, paying particular attention to spatial issues. We note the contrasting descriptive traditions of Lombroso (characteristics matter) and Beccaria (incentives matter); and the contrasting policy traditions of incapacitation(predict who will offend and keep them from doing it) and deterrence (uncover who offended and punish them). The economics of crime has several points of contact with the economics of space, since the commission of an index crime requires proximity between offenders and victims (or their property). We explore these linkages, as well as a range of other issues: the effects of certainty and severity of punishment on crime, the role of stereotypes in interactions between offenders, victims and law enforcement officers, and racial disparities in victimization, offending and incarceration. The economics of crime has made tremendous progress, but enormous variation across both time and space remains poorly understood, and many non-traditional explanations often neglected by economics need to be explored more systematically.