DP12216 Shopping externalities and retail concentration: Evidence from Dutch shopping streets

Author(s): Hans R.A. Koster, Ilias Pasidis, Jos van Ommeren
Publication Date: August 2017
Keyword(s): agglomeration economies, footfall., rents, retail, shopping externalities, Vacancies
JEL(s): R30, R33
Programme Areas: International Trade and Regional Economics
Link to this Page: www.cepr.org/active/publications/discussion_papers/dp.php?dpno=12216

Why do shops cluster in shopping streets? According to theory, retail firms benefit from shopping externalities. We identify these externalities for the main shopping streets in the Netherlands by estimating the effect of footfall - the number of pedestrians that pass by - on store owner's rental income, which is a composite of the effects of footfall on shop rent and on vacancy rates. We address endogeneity issues by exploiting spatial variation between intersecting streets. Our estimates imply an elasticity of rental income with respect to footfall of 0.25. We find that a shop's marginal benefit of a passing pedestrian is € 0.005. It follows that subsidies to retail firms that increase with the levels of footfall generated by these shops are welfare improving. The optimal subsidy to store owners is, on average, 10 percent of the rent, but is higher for retail firms that generate high levels of footfall. Although explicit subsidies are controversial and difficult to implement, our results seem to justify current policy practices which cluster shops by pedestrianisation of shopping streets or by providing subsidised parking for shoppers.