Internalizing Externalities: the Pricing of Space in Shopping Malls

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Abstract
Consumers are attracted to malls because of the presence of well-known an- chors—department stores with recognized names. Anchors generate mall traffic that indirectly increases the sales of lesser-known mall stores. Lesser-known stores can free ride off of the reputations of better-known stores. Mall developers internalize these externalities by offering rent subsidies to anchors and by charging rent premi- ums to other mall tenants. We estimate that anchors receive a per foot rent subsidy of no less than 72 percent that which nonanchor stores pay. Anchors pay a lower rent per square foot in larger malls (with several department stores) than in smaller malls (with fewer department stores), even though sales per square foot of anchors are the same in the two types of malls. In contrast, the sales and rent per square foot of other mall stores are higher in superregional malls than in regional malls. Economists are often placed in uncomfortable situations when they must make judgments about the scope and size of externalities with limited infor- mation. In only rare situations do economists have independent measures of externalities and market prices that reflect those externalities. For exam- ple, the availability of house prices and independent measures of air quality allow a researcher to estimate the effect of air quality on house prices. In a few instances, economists have been able to show how imperfect informa- tion and information asymmetries prevent externalities from being internal- ized.1 In some cases, they have discovered market prices that reflect how
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