Location of Housing and Industry Around a Central Shopping District

Abstract

We investigate the endogenous emergence of residential and industrial districts around a central shopping district (CSD). Households wish to locate near firms and near the CSD due to commuting costs proportional to distance. Firms wish to locate near households because this reduces the wage they need to pay to attract workers, and near the CSD due to the iceberg cost of transporting their output to the CSD. Depending on the relative magnitude of three cost parameters (commuting to work, commuting to shop, transporting output), different urban structures arise. If the cost of commuting to shop is large and the cost of commuting to work is small (relatively to the cost of transporting output), households locate in the centre and firms in the periphery. The opposite occurs if both costs are very small. If the cost of commuting to shop is small and that of commuting to work is large, housing and industry become integrated. Complex urban structures emerge in intermediate cases.