Geographical Concentration and Economic Growth: Do Externalities Matter?

Abstract

Regardless of the reasons leading to its formation, it is widely accepted that geographical concentration of economic activity triggers increases in productivity. However, there are almost no studies that analyze the relationship between geographical concentration and economic growth. Moreover, when looking at the relationship between geographical concentration and productivity, past research almost unanimously modeled the underlying externality based on a scale measure (size) or an index. Starting from the assumption that the influence of geographical concentration on growth can be best modeled taking in consideration an intensive measure, such as population density, as an indicator of externalities, this study uses a growth accounting framework to assess the effect of geographical concentration on economic growth. It finds population density to be a good candidate for evaluating the externality influence, since a significant portion of the variation in economic growth over U.S. counties and BEA regions is explained by differences in population density.Economic growth, Externalities, Geographical concentration, Spatial models