An Equilibrium Model of Office Location and Contact Patterns

In this paper, we develop an equilibrium model of office location, which explicitly considers the source of agglomeration economies and which sees firm location and contact patterns as jointly and endogenously determined. We solve the model explicitly for contact-benefit, facility-cost, and transport-cost functions representative of medium-sized US cities. The resulting rent functions are concave rather than convex as they are in most models of industrial and residential location. The source of the concavity is that firms make contacts throughout the central business district (CBD). To determine the role of agglomeration economies associated with interfirm contacts, we alter the contact-benefit function, the transport-cost function and the size of the CBD. We find that agglomeration economies have a strong effect on location and, indeed, are often sufficiently strong to produce counterintuitive results. For example, an increase in transport costs causes a decrease rather than an increase in transport expenses, because in the city, which is now smaller, a firm decreases the number of contacts. Further, the increase in transport costs does not increase the relative attractiveness of the center.