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This chapter examines the impact of social interactions on firms' location decisions, focusing on the effects of proximity to other firms, the size of the total urban economy, the availability of a suitable labor force, and risk pooling. It first introduces models that take into account the location of firms under uncertainty, with particular emphasis on the role of site rents in guiding location decisions and the problems that site rents encounter in the presence of more complex economic geography. The model is expanded to allow for randomness in firms' evaluations of alternative sites and for interdependence among firms' location decisions. The model is also extended to a framework for defining empirical measures of agglomeration, and the chapter concludes with a review of empirical studies that explore localization or urbanization effects via the measurement of total factor productivity at the plant level.

This chapter examines the location decisions of individuals, with particular emphasis on neighborhood effects in housing markets and how they relate to the role of prices in rationing admission to communities and neighborhoods in market economies. It begins by introducing models of individual location decisions that rely on the characteristics approach in the presence of contextual effects and use individual dwelling units as the object of choice. It then presents examples of sorting models that allow for choice of neighborhood with endogenous contextual effects, followed by a discussion of models and associated empirical results for neighborhood choice and housing as a joint decision that allow for social effects. It also describes models of location decisions, proposed by Thomas Schelling, that take into account the influence of racial preferences and neighbors' reactions. Finally, it looks at hierarchical models of community choice with social interactions.

This chapter explores what the interactions of individuals and firms in their vicinity and in broader communities reveal about the spatial structure of cities as self-organization by agents. It first introduces a benchmark, the Alonso–Mills–Muth model of a city in its bare essentials, and examines its implications for urban density and the associated pattern of land prices in the case with a predetermined center, the central business district (CBD). It then considers the geometry of spatial equilibrium when there is no predetermined center and social interactions are dispersed, along with the location decisions of firms in urban space, monocentric versus polycentric models of the urban economy, and the Lucas–Rossi-Hansberg models of urban spatial structure with productive externalities. It also analyzes neighborhood effects, urban equilibrium when proximity is a conduit for the transmission of job-related information, and the link between choice of job matching and spatial structure.

The authors lament the little attention that has been accorded to the role of space in the economy. They discuss the location decisions of firms and consumers under various assumptions and show how important the introduction of a land market can be for such decisions. They conclude that no satisfactory comprehensive model that incorporate the simultaneous decisions of firms and consumers and includes capitalisation and transport costs exists. They nevertheless consider that there is a rich set of problems to be explored and which may yield such a model.

This book examines the economic dimensions of social interactions, with an eye towards enriching our metaphors for understanding and modeling the fabric of communities, their neighborhoods, and their consequences for studying larger regional and national economies. To this end, the book considers urban externalities that economists and other social scientists see as instances of social interactions, as well as the location decisions of individuals and firms. Focusing on the city, the book also explores urban structure, industrial specialization and diversification, and urban growth in the context of national economic growth. Finally, it discusses new economic geography, an approach that seeks to integrate urban and regional economics, both in a national and an international context.

The private sector has the potential to be a potent force in the fight against global poverty. That, however, is not its raison d’être. As a descriptive matter, companies seek higher profits. This chapter explores what private companies now do and how policies might be designed so that private companies will do more to improve earning opportunities for the poor as they pursue higher profits. Several issues are explored including firms’ location decisions, business environment and investment climate, consumer movements, and corporate social responsibility.

Measuring the extent to which host-country taxes affect the allocation of multinational corporations' foreign direct investment across foreign jurisdictions has been an active area of research in international taxation. Using data from the U.S. Department of the Treasury corporate tax return files for 1984 and 1992, this chapter addresses two related questions. The first question is how sensitive U.S. firms' investment location decisions are to tax rate differences across countries. The second question is whether the location of investment abroad by U.S. firms has become more sensitive to tax rate differences across countries. A finding that investment location decisions have become more sensitive to tax rates would be consistent with the view that technological advances and the loosening of trade restrictions and capital controls have in recent years increased the ease with which capital can cross national borders. If different locations became closer substitutes for the location of production, it would not be surprising if investment location decisions became increasingly responsive to tax considerations.

A firm's response to changes in environmental policy is an issue that has drawn considerable attention in the environmental economics literature. Questions that usually arise when environmental policy is introduced or changed are primarily associated with how firms react regarding their choices of investment in productive or abatement capital, the mix of relatively more or less polluting inputs, the choice of labor input or the decisions about research and development expenses, or what kind of decisions firms make regarding location choices. This chapter explores the behavior of polluting firms regarding expansion of abatement capital and location decisions in the presence of environmental policy. Environmental policy takes the form of emissions taxes or tradable emissions permits, as well as subsidies for the costs of expanding abatement capital. The chapter emphasizes firm behavior under uncertainty and irreversibility.

This chapter analyses market suppliers’ decisions relating to the pricing, promotion, and creation of capacity to manufacture goods that embody product innovations. The discussion encompasses durable and non-durable products; monopoly and oligopoly; horizontal and vertical differentiation; and original, new-to-market, and new-to-firm products. Firms may have incentives to further innovate after the launch of the original product; this will lead to lower prices and to greater demand and output. This may also imply greater capacity creation (in some location). It is found, however, that the incentives of the originator and those of potential new entrants may differ and will tend to lead to lower prices when there are many suppliers as opposed to when there are fewer. This means that, if there are more innovators, the quantity supplied will be higher; creation of capacity may also be greater, but findings on promotional expenditures are not conclusive.