Assessing Agglomeration Economies in a Spatial Framework with Endogenous Regressors

Abstract

This paper is concerned with the influence of agglomeration economies on economic outcomes across British regions. The concentration of economic activity in one place can foster economic performance due to the reduction in transportation costs, the ready availability of customers and suppliers, and knowledge spillovers. However, the concentration of several types of intangible assets can boost productivity as well. Thus, using an interesting dataset which proxies regional productivity, we will assess the relative importance of agglomeration and other assets, controlling both for endogeneity and for spatial autocorrelation at the same time. Our results suggest that agglomeration has a definite positive influence on productivity, although our estimates of its effect are dramatically reduced when spatial dependence and other hitherto omitted variables proxying intangible assets are controlled for.

Keywords: agglomeration economies, endogeneity, intangible assets, spatial autocorrelation

JEL Classification: C21, J34, R10, R11, R12