How Do Location Decisions of Firms and Households Affect Economic Development in Rural America?

Issues  Why do the spatial inequalities in economic development exist?  Why are the spatial differences in wages and rents not bid away by households and firms in search of high income and low production costs?

Importance of the Issues  It is central for understanding many aspects of economic underdevelopment in rural areas.  It is also informative for developing policies to promote economic development and quality of life in rural communities.

Literature  The issues have been explored in the economic literature, particularly in the context of international economic development (see, e.g., Henderson, et al. (2001) for a review).

Causes of spatial inequalities in economic development  Natural endowments (e.g., water availability, environmental amenities)  Accumulated human and physical capital  Economic geography (remoteness, access to information and markets)

Gaps in the Literature  These theories have rarely been tested in the context of economic development in rural America.  No study, to our knowledge, has evaluated the relative contribution of these factors to economic development in rural America.

Objectives  To evaluate the contributions of natural endowments, accumulated human and physical capital, and economic geography to the spatial inequalities in economic development in rural America  To better understand the role of public policy such as public investment in rural infrastructure and urban amenities in stimulating economic development in distressed areas.

Methods  Develop a theoretical model to analyze the interaction between location decisions of firms and households as affected by amenities, capital, and geography.  Conduct an empirical analysis to evaluate the effect of the three factors on the spatial distribution of economic activities across counties in the US.  Examine the effectiveness of alternative policies for stimulating economic development in distressed areas.

The Model  Focus on the interaction between location decisions of firms and households. If households require higher wages to live in low- amenity locations, the firms in those locations must have some productivity advantage to be able to pay the higher wages. Conversely, if households are willing to accept lower wages to live in amenity locations, firms would follow workers to those locations unless there are some disadvantage in those places.

The Model Household Location Decisions  Households have preferences defined over residential space (h), a numeraire non-housing good (z), and amenities at residential location (ε).  Each household supplies one unit of labor and receives income (y) in return.  Households choose residential locations and a consumption bundle to maximize utility: Max u(h,z; ε) s.t. ph+z=y This defines the household’s indirect utility function V=V(y,p; ε).

Household Location Decisions – cont.  The equilibrium condition for households is given by V(y, p; ε)= const.

Fig. 1. Iso-utility curves Household Location Decisions – cont.

Firm Location Decisions  Capital is completely mobile.  A firm chooses locations to minimize total production and transportation cost by considering the tradeoff between input prices, local infrastructure and worker skills, and transportation costs.

Firm Location Decisions–cont. The equilibrium condition for firms: C(y, p; κ, ρ)= const. where κ = the level of accumulated human and physical capital (e.g., labor skills, local infrastructure) ρ = location characteristics

Firm Location Decisions–cont.

Equilibrium

On-going Research  Estimate an equation system representing the demand and supply sides of the US labor and housing markets using the county-level data.  Evaluate how natural amenities, accumulated capital, and economic geography affect income, jobs, housing price, and developed acres in US counties.