Consumption Side Agglomeration Economies in Japanese Cities

We estimate the consumption values of urban agglomeration economies and social overhead capital for Japanese metropolitan areas. Following the pioneering work of Tabuchi and Yoshida (2000), our approach exploits the fact that consumers tolerate higher living costs if they benefit from urban agglomeration economies and/or better social overhead capital. This living cost approach requires an appropriate measure of the representative living cost in a metropolitan area; however, it is not easy to estimate because housing prices vary widely within a metropolitan area. Tabuchi and Yoshida (2000) choose the average land price for commercial use as a measure of housing costs in a metropolitan area. Because the prices of residential land are typically much lower than those of commercial land, this might have resulted in biased estimates. We estimate bid rent functions for suburban municipalities within metropolitan areas to cope with the aggregation problem. According to our estimation results, the elasticity of the real wage with respect to city size is about -9.3% if we use the land price as the housing price variable and about -7.9% if we use housing rent data. These numbers are comparable to those obtained by Tabuchi and Yoshida (between -7% and -12% depending on the specification). Another finding is that social overhead capital in a municipality has much larger and more significant effects than city size: the elasticity of the real wage with respect to social overhead capital is about -24.4% in the housing rent estimation and about -45.7% in the land price estimation.