The Costs of Agglomeration:

Land Prices in French Cities

Pierre-Philippe Combes, Gilles Duranton & Laurent Gobillon

Sergio Bobka

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What are urban costs?
• As cities grow larger, some changes may occur:
• They become more productive as agglomeration effects become stronger.
• They become more expensive as housing and transport costs rise.
• Their attractiveness in terms of amenities may change.

• This is related with the fundamental trade-off of spatial economics,

where firms become more productive as cities become denser and
therefore wages can be higher to try to compensate for the increase
in the urban costs.

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Main findings
• Bigger cities have a higher increase in expenditures as a result of
population growth than smaller cities.
• This increase is higher in the short run as house prices are sensitive to
population changes.
• This seems consistent with the fundamental trade-off of spatial
economics.

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Why is it important?
• It addresses several identification issues and implements an
integrated framework to guide its empirical work.
• The results measure the increase in expenditure as a result of
population growth.
• It may shed light on policies that want to limit city expansion and high
housing costs.

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Challenges
• How to estimate urban costs as such.
• A theoretical model is developed in order to estimate these costs.
• Urban costs and population are simultaneously determined.
• The implementation of instrumental variables is used to solve this
issue.

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Data
• Data for housing prices:
• Indices estimated at the municipality level.
• Gathered from the Ministry of Sustainable Development for 2000-2012.
• Log of price of square meter on indicator variables.
• Data for land prices:
• Transaction record for a parcel of land with building or rebuilding permit.
• Gathered from the Survey of Developable Land Prices for 2006-2012.
• Information such as price, municipality, area and other characteristics.
• Data for family expenditure:
• Share of housing in expenditure.
• Gathered from the French Family Expenditure Surveys from 2006 and 2011.
• Information from both houseowners and renters.

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Empirical Framework
• Households have a utility function that they want to maximize with
regards to a budget constraint.
• There exists a spatial equilibrium where the price of housing adjusts
so that residents are indifferent across all locations in a city.
• Assuming cost of transportation 0 and free trade of the composite
good. Elasticity of urban costs with respect to population can be
written as:

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Empirical Strategy
• Measure unit house prices in cities at a central level.
• Estimate the elasticity of house prices with respect to city population.
• For this estimation, IV is used to account for endogeneity between these
variables.

• Estimate share of housing in expenditure.

• Use this estimates to calculate the elasticity of urban costs.

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Results

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Conclusions
• 10% larger population in a small city leads to a 0.3% increase in
expenditure for its residents to remain on the same utility and 0.8% if
they live in Paris keeping land area constant.
• In the short run, house prices are fairly sensitive to population
changes.
• Allowing for expansion in land areas reduces these values to almost a
half.

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Relevancy
• The results seem consistent with the fundamental trade-off of spatial
economics.
• In the short run workers may reside where housing is most affordable
and not where they are more productive.
• Therefore, the spatial equilibrium may be broken on high population
cities.

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Thank you

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