Abstract:
One account of spatial concentration focuses on productivity advantages arising from market size. We investigate this for 40 regions of Japan. Our results identify important effects of a region’s own size, as well as cost linkages between producers and suppliers of inputs. Productivity links to a more general form of ‘market potential’ or Marshall-Arrow- Romer externalities do not appear to be robust in our data. The effects we identify are economically quite important, accounting for a substantial portion of cross-regional productivity differences. A simple counterfactual shows that if economic activity were spread evenly over the 40 regions of Japan, aggregate output would fall by 5 percent. – markets ; regions ; productivity