1 MODELING OF A RESIDENTIAL LAND MARKET WITH A SPATIALLY EXPLICIT AGENT-BASED LAND MARKET MODEL (ALMA) Tatiana Filatova 1 , Anne van der Veen 1 , Dawn C. Parker 2 1 – University of Twente, Netherlands 2 – George Mason University, USA Corresponding author e-mail: T.Filatova@ctw.utwente.nl Abstract: We construct a spatially explicit agent-based model of land market. There are two main actors in the land market model: buyers and sellers of land. Heterogeneous agents sort among locations with respect to the distance from the city center and environmental spatial externalities. Land prices are formed endogenously via agents’ interactions. The links between individual behaviors and macro-phenomena (land patterns and land prices in the case of land markets) emerging from their interactions are explored. The basic model of buyers and sellers trading land in the urban area produces results identical to the monocentric urban model. However, more complex dynamics of land prices appears when environmental amenities are added. Agent-based modeling (ABM) is coming into use to explore market dynamics. According to (Marks 2006) there are five examples of designed markets: financial markets, markets for pollution emissions, auctions for electro-magnetic spectrum, electricity markets and on-line e- markets. The use of agent-based modeling (ABM) technique implies heterogeneity among agents, implicit modeling of agents interactions and cross-scale dynamics. ABM has been successfully used to model economic markets from bottom-up since mid 1990s (Gode and Sunder 1993; Arthur, Holland et al. 1997; Lux 1998), mainly in the filed of financial markets. The reasons why economists started to use ABM in their research are widely discussed in the agent-based computational economics (ACE) literature (Arthur, Durlauf et al. 1997; Judd and Tesfatsion 2006). In short, they can be summarized as an alternative solution to the idea of a representative agent in economics (which goes in contrast with the real-world economic agents who are heterogeneous (Kirman 1992)) and the problem of getting to the equilibrium in one shot (when the empirical evidence shows that economic systems are dynamic and adaptive). ACE considers economy as a system of many micro agents, who by interacting with each other give rise to global regularities (market institutions, employment rate or income distribution), which in turn influence local interactions. (Tesfatsion 2006). Conventional economic theory declares equilibrium, which is by definition a unique static state, as an essence. In contrast ACE considers economy as a dynamic system, which tends to come to equilibrium and in some cases reaches it, but also accounts for multiple equilibria or out-of equilibria situations (Arthur 2006). Land markets are specific markets. Land has a complicated history in economic theory (Randall and Castle 1985) and was not usually treated in a spatially explicit way. Researches in spatial economics admit that land differs from other goods in a number of ways because it is immobile, has unique and unalterable properties (e.g., slope, affiliation with a region/municipality, access to other locations), usually has a inelastic supply and use of land by one agent unavoidably affects the use and value of the surrounding land (generates externalities) (Buurman, Rietveld et al. 2001; Wu, Adams et al. 2004). In turn, modeling land markets involves two challenges: 1. In contrast to other designed markets designed land market should have not only heterogeneous agents (e.g., fundamentalists and chartists in financial markets) but also heterogeneous goods (each parcel of land or house has very different characteristics which determine agents’ willingness to pay and consequently market prices). This fact complicates the formalisation of price formation procedure because different agents (consider a business firm and a farmer for example) might value the same piece of land in