11.1.19

SOMETIMES, YOU CAN TEST THE HYPOTHESES.

Last summer, I raised the possibility that people participating in high-value-added activities might be bidding up urban rents.
Two principles of land use immediately emerge.  First, activities that command the highest price Pi have a ceteris paribus advantage in bidding for any parcel of land.  Second, activities that encounter higher transportation costs lose advantage at greater distances.  Thus, in the two-century old model, dairy products command a high price and spoil (we're before mechanical refrigeration or railroads, recall) quickly, thus those will be closest to the city, but dairies will be out-bid by timbering or cornfields or ranching.
That's straightforward, as is the extension I suggested.
But will we ever see a central business district that generates so much in the form of locational rents, in the presence of so small a transportation cost, for knowledge or financial industries (and there are reasons to suspect that it will be knowledge or financial industries, not manufacturing) that the service businesses get priced out, and the only land devoted to housing of any kind is at a distance, as appears to be happening in San Francisco, but not yet in Chicago?
What's fun is going through Tyler Cowen's roundup of economics conference papers where he thought this was worth posting.
I estimate a spatial equilibrium model to show that the rising value of high-skilled workers’ time is an important driving force behind the gentrification of American central cities. I show that the increasing value of time raises the cost of commuting and exogenously increases the demand for central locations by high-skilled workers. While change in value of time is an initial force behind gentrification, its effect is substantially magnified by endogenous amenity improvement. The model implies that welfare inequality in the recent decades increases by more than the rise in earnings inequality if the forces behind gentrification are considered.
As those amenities are competing with the high-value-added employees and the networking creatives in their entrepreneurial districts, there are likely opportunities for additional research on the limitations to either the rents or the amenities.

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