Agglomeration, commuting costs, and the internal structure of cities

Urban areas are characterized by dispersed employment patterns and mixed land use. Lucas and Rossi-Hansberg (LRH) [Econometrica 70 (2002), 1445-1476] develop a model where the urban spatial structure is determined by the external benefits of agglomeration and the commuting costs for workers. This paper reviews and tests implications of the LRH-model for residential rents using semiparametric regression techniques. We show that in mixed urban areas, agglomeration is an important determinant of the rent, while in predominantly residential areas proximity to a business area significantly impacts rents, as is suggested by the theory. © 2012 Elsevier B.V. All rights reserved.