Spillover effects and city development

Abstract

Over the last decades, the success of cities has hinged on their ability to become centers of consumption. Encouraging firms to settle and to provide a rich variety of services is therefore central for increasing the liveliness of cities. However, firms consider potential spillover effects generated by other market players when deciding whether or not to enter the market. This paper focuses on the food and beverage service industry in the Netherlands, and investigates to what extent the presence of urban amenities produces positive spillovers on other amenities in the market. Using a unique dataset on firms' revenues and the number of market participants, the study extends previous entry models and simultaneously estimate a static two-type entry model with revenue equations. The model controls for unobserved characteristics that can be erroneously interpreted as spillovers. It also allows for product differentiation. I find that for the case of take-out places and bars, spillover effects upon entry are mainly unidirectional: the entry of bars positively affects the profitability of take-out places, but not vice versa. This shows evidence that different amenity services may have asymmetric effects on other amenities when entering the market. Building on this result, I further analyze the potential effect of different public policies, such as strategically granted tax reliefs or redistributive schemes, on the ultimate market structure. The results show that taking into account this asymmetry is relevant for both new entrant firms and urban planners.