Thick market externalities in a spatial model

Abstract

It is natural to think of thick market externalities as spatial phenomena. When agents are in close physical proximity, potential trading partners are more numerous and less costly to reach. Counteracting such agglomeration benefits is the dispersion force due to land being an essential input in production. The distribution of economic activities over space is an outcome of how decisions on location, land demand, and the search strategy of agents interact in spatial equilibrium. More desirable locations are those that allow their occupants more abundant and less costly access to potential trading partners. In spatial equilibrium, these are the densest locations, the occupants of which benefit from the strongest thick market externalities.

Amenities and wage premiums: the role of services

“…A body of research has studied the relationship between city sizes and wages and has shown that wages are higher in larger cities (for example, Glaeser 2008;Baum-Snow and Pavan 2013). Such benefits of density come from agglomeration economies (Glaeser and Maré 2001;Rosenthal and Strange 2008;Tse 2010;Davis and Dingel 2019). For instance, denser labor markets facilitate the matching of workers and employers and the exchange of productive ideas.…”

The Spatial Origin of Commerce*

“…23 23 This is proved more formally in Tse (2010) in a setting that does not allow for agents choosing to become middlemen. If the matching rate is not straightly proportional to the mass of agents residing in the search area, the optimal search area of an agent can stop short of reaching all other agents with which a trade can profitably be carried out. …”

“…In Beckmann (1976), where each household maximizes utility over land and nonland consumption subject to paying a traveling expense that is proportional to the average distance between the given household and the rest of the city’s population, the equilibrium distribution is symmetric and unimodal around the city center. In Tse (2010), I generalize the analysis to where an agent may choose to just travel to meet a subset of agents in the regional economy; the resulting distribution remains symmetric and unimodal around the center.…”

“…InBeckmann (1976), where each household maximizes utility over land and nonland consumption subject to paying a traveling expense that is proportional to the average distance between the given household and the rest of the city's population, the equilibrium distribution is symmetric and unimodal around the city center. InTse (2010), I generalize the analysis to where an agent may choose to just travel to meet a subset of agents in the regional economy; the resulting distribution remains symmetric and unimodal around the center.12 In an equilibrium in which only meetings between neighboring agents, but not agents far apart from one other, would yield positive match surpluses, middlemen may cluster at multiple locations in the region, just as firms and households may locate at multiple areas in the models ofOgawa and Fujita (1980),Fujita and Ogawa (1982), and Rossi-Hansberg andLucas (2002). This analysis is taken up in Section 5.…”

“…The crucial assumption is that elements of random search remain. 23 This is proved more formally inTse (2010) in a setting that does not allow for agents choosing to become middlemen. If the matching rate is not straightly proportional to the mass of agents residing in the search area, the optimal search area of an agent can stop short of reaching all other agents with which a trade can profitably be carried out.24 With partially directed search, it becomes necessary to account for the fact that an agent may be able to trade not only when she initiates contact with another agent, but also when she is being contacted by other agents-agents who themselves are choosing search areas optimally.…”