Land prices and agglomeration: Theory and evidence from the Tokyo metropolitan area

This study investigates how rent sensitivity to population growth affects agglomeration in the Tokyo metropolitan area. In the theoretical part, we investigate the model of a metropolitan area with heterogeneous regions. We find that if the rent is not sensitive to population growth, the population grows more in central regions. In contrast, if the rent is sensitive to population growth, the population grows more in suburban regions. In the empirical part, we test the implications of the model using municipality-level panel data for the Tokyo metropolitan area. We find that the population elasticity of land price was greater than two before the mid 1990s, but was less than two thereafter. We also find that in the Tokyo metropolitan area, the population grew more in suburban regions until the mid-1990s, but grew more in central regions thereafter. These empirical findings are consistent with our theoretical predictions. We confirm that the results are robust even when we change the subsample periods. We also show that essentially the same results hold even when implementing the same experiment for the Osaka metropolitan area, the second largest metropolitan area in Japan.