Agglomeration, housing affordability, and new firm formation

The role of subway network

In addition to the determinants of new firm formation that are widely documented in the literature, we also account for the effects of efficient transportation networks and the availability of low-cost housing on business establishments.

  • ​Does the improved accessibility to business clusters and low-cost housing by the subway network foster new firm formation?

  • Is there heterogeneity across firm types?

Spatial distribution of new firms in the Beijing Metropolitan Area

Spatial distribution of new skill-intensive firms in the Beijing Metropolitan Area

Spatial distribution of subway to low-cost rental housing accessibility.

Subway expansion and subway to low-cost housing accessibility

Data we have

New firm formalization and agglomeration economies

Data on new business formation and agglomeration economies are obtained from annual firm registration records in the registry database of State Administration for Industry and Commerce (SAIC). SAIC records all firms that are registered by the end of each year and includes the firms’ standard two-digit industry codes (SIC Code) as well as the registered addresses. We use the number of newly established firms at the grid cell level to measure the new firm formation.

Subway construction boom and dynamic travel time

To measure the accessibility through the subway system, we retrieve travel time from each grid cell to all the other grid cells in the Beijing Metropolitan Area using Baidu Application Programming Interface (API). We have obtained 6,484,662 bilateral travel times. We use these historical bilateral travel times to calculate the accessibility to business clusters and low-cost rental housing.

Low-cost rental housing 

To measure the low-cost rental housing supply, we use the rental transaction records on 5i5j.com from 2005 to 2010 to identify low-cost rental housing stock in Beijing. Our definition of low-cost rental housing are those having a deflated rent per square meter less than 28.87 RMB (average deflated rental price) and a housing area less than 69.90 square meters (average housing area).

Hypothesis

1. Given the distance to CBD (di = dj) and the intensity level of agglomeration economies (Ai = Aj), a location with improved accessibility to low-cost rental housing through the subway network would gain more new businesses.

2. Given the distance to CBD (di = dj) and the accessibility to low-cost rental housing ( Hi = Hj), a location with a higher intensity level of agglomeration economies (Ai < Aj) would experience a higher rate of new firm formation.

3. Firms in skill-intensive sectors have a higher valuation of commuting amenities and a stronger incentive to access agglomeration benefits. We would expect a larger treatment effect of improved accessibility to business clusters and low-cost housing on new firm formation in skill-intensive sectors.

Identification Strategy

Illustration of treatment and control group assignment in 2014

What we find...

  • A positive shock to the accessibility to business clusters and low-cost rental housing leads to higher growth in new business creation.

  • New skill-intensive firms have a larger response to such shocks.

  • The elasticity of new skill- intensive firms with respect to the accessibility to business clusters is roughly 0.44, while the elasticity with respect to the accessibility to low-cost rental housing is about 0.74.

  • However, given our data, it is difficult to know whether the effect is driven by the shift in demand or supply.

    • The newly added subway stations and lines improve the supply of workers across space because of reduced commuting cost.

    • A demand channel could be at work as well. The improved connectivity increases the market size and hence demand.

Team

Siqi Zheng

MIT Sustainable Urbanization Lab, Department of Urban Studies and Planning, Center for Real Estate​

Rui Du

Department of Economics, Oklahoma State University

MIT Sustainable Urbanization Lab

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