Spatial Externalities and Empirical Analysis: The case of Italy

Abstract

In the last ten years the space issue, i.e. the study of the role played by space in economic phenomena, has attracted a lot of interest from many economic fields. Both the suitability of spatial economics to address questions posed by globalization, and improves in modeling techniques are at the basis of this revolution. The combination of increasing returns, market imperfections, and trade costs creates new forces that, together with factor endowments, determine the distribution of economic activities. These spatial externalities makes agents' location choice highly interdependent, thus allowing to understand the empirical spatial correlation between demand and production previously observed by the market potential literature. Despite their theoretical relevance, there is still little evidence, especially at large scale level, on the effective contribution of this new identified forces to agents' location decisions. The aim of this work is to directly estimate a model of economic geography on some Italian regional data in order to both test the empirical relevance of this theory and try to give a measure of the geographic extent of spatial externalities.Economic Geography; Spatial Externalities; Market Potential