Socially optimal and equilibrium distributions of office activity: Models with exogenous and endogenous contacts

Two models of the location of office activities within a city are developed. In the first model, the pattern of interoffice contacts is specified exogenously as has been traditional in the literature. In the second model the contact patterns as well as the distribution of firms are endogenous. For both models, the market equilibrium distribution of office activities is not socially optimal. Two sources for this market failure are identified in these models: (1) agglomeration economies and (2) transactional externalities arising from firm interdependence and mobility.