Lump-sum Moving Cost
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When one sets out to model the market for office space, one of the central variables that requires modelling is the demand for office space or the occupied stock of office space. In one of the first attempts Rosen (1984) models the occupied stock of office space as being a function of the employment level in the key service producing industries and the real rental rate. When one projects this aggregate model to the microeconomic level it implies that office space using firms change their use of office space every time their employment or the rent changes. However, we see in practice that firms only infrequently change their use of office space. To remedy this Wheaton (1987) models the net absorption (that is the change in occupied stock) as a partial-adjustment process: current absorption equals a fraction of the difference between desired office space use and lagged actual office space use. Desired office space use is again modelled as a function of office employment and the real rental rate. Additionally, Wheaton adds office employment growth to account for expectations regarding future office space needs. Hence, Wheaton accommodates the gradual change in occupied office space in two ways, the partial adjustment of net absorption and the appearance of office employment growth in desired office space use.
KeywordsDrift Rate Adjustment Cost Vector Error Correction Model Office Space Wage Ratio
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