Sorting into and out of Rural and Urban Retail Markets

We compare the entry decisions and relative success of rural and urban retail start-ups in Iowa from 1992 through 2011. We use an expanded variant of the pull factor idea to predict the level of local retail sales. We then examine how the factors that increase sales affect the incentive to enter or exit an urban or rural market. We show that the same factors that affect retail sales also affect new retail firm entry and retail firm exit. Our findings are consistent with a model where the very best generally skilled entrepreneurs sort into thicker, urban locations where they are subjected to frequent arrival of other potential entrepreneurs who have some probability of having an even higher valued use for the site. Urban entrepreneurs may decide to sell their site to another entrepreneur, even if the first entrepreneur has a successful venture. On the other hand, the scarcity of potential successors in thinner rural markets means that a large share of the skill set for rural entrepreneurs is specific to the match between the entrepreneur and the location. Because the value of the rural firms are tied to the first entrepreneur, much of the venture’s value cannot be priced were the venture to be sold, and so rural markets have little turnover in retail sites.