Modelling urban development in New Zealand

We formulate and estimate a simple dynamic spatial general equilibrium model of urban development. Notwithstanding its simplicity, the model allows for adjustment frictions in housing markets; workers with heterogeneous productivities and preferences; and agglomeration economies in production and consumption. We estimate our model as a system of equations using panel data for workers residing in 132 urban settlements in New Zealand for the period 1976 to 2013. In terms of housing markets, we find strong evidence of increasing marginal costs and large adjustment frictions. The latter suggests demand shocks lead to temporarily elevated prices. In terms of agglomeration economies, we find New Zealand’s cities and towns offer economies of scale to producers, in the form of higher wages, but diseconomies of scale to consumers. By exploiting the panel structure of our data, we consider whether our findings are stable over time. We use the results of our model to compare relative productivity and amenity levels in New Zealand’s cities and towns and consider implications for research and policy.