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Problems with Regional Production Functions and Estimates of Agglomeration Economies: A Caveat Emptor for Regional Scientists

Over the last 20 years or so, mainstream economists have become more interested in spatial economics and have introduced largely neoclassical economic concepts and tools to explain phenomena that were previously the preserve of economic geographers. One of these concepts is the aggregate production function, which is also central to much of regional growth theory. However, as Franklin Fisher, inter alios, has shown, the conditions necessary to aggregate microproduction functions into an aggregate production function are so stringent that in all probability the aggregate production function does not exist. This paper shows that the good statistical fits commonly found empirically are solely due to the use of value data and an underlying accounting identity. The result is that the estimates obtained cannot be regarded as providing evidence of the underlying technological structure of the spatial economy, including the aggregate elasticity of substitution, the degree of returns to scale, and the rate of technical progress.

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Paper provided by Levy Economics Institute in its series Economics Working Paper Archive with number wp_725.

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Date of creation: May 2012
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Handle: RePEc:lev:wrkpap:wp_725
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  1. O'Donnell, A T & Swales, J K, 1979. "Factor Substitution, the C.E.S. Production Function and U.K. Regional Economics," Oxford Economic Papers, Oxford University Press, vol. 31(3), pages 460-76, November.
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  3. J. S. L. McCombie, 1998. "'Are There Laws of Production': an assessment of the early criticisms of the," Review of Political Economy, Taylor & Francis Journals, vol. 10(2), pages 141-173.
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  5. Nakamura, Ryohei, 1985. "Agglomeration economies in urban manufacturing industries: A case of Japanese cities," Journal of Urban Economics, Elsevier, vol. 17(1), pages 108-124, January.
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  8. Roberto Esposti & Stefania Bussoletti, 2008. "Impact of Objective 1 Funds on Regional Growth Convergence in the European Union: A Panel-data Approach," Regional Studies, Taylor & Francis Journals, vol. 42(2), pages 159-173.
  9. Harris, Richard I D & Trainor, Mary, 1997. "Productivity Growth in the UK Regions, 1968-91," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 59(4), pages 485-509, November.
  10. Mercedes Delgado & Michael Porter & Scott Stern, 2010. "Clusters and Entrepreneurship," Working Papers 10-31, Center for Economic Studies, U.S. Census Bureau.
  11. Vassilis Tselios, 2009. "Growth and Convergence in Income Per Capita and Income Inequality in the Regions of the EU," Spatial Economic Analysis, Taylor & Francis Journals, vol. 4(3), pages 343-370.
  12. John S. L. McCombie & Mark Roberts, 2007. "Returns To Scale And Regional Growth: The Static-Dynamic Verdoorn Law Paradox Revisited," Journal of Regional Science, Wiley Blackwell, vol. 47(2), pages 179-208, 05.
  13. Hoover,Kevin D., 2012. "Applied Intermediate Macroeconomics," Cambridge Books, Cambridge University Press, number 9780521763882.
  14. Luisa Corrado & Bernard Fingleton, 2011. "Where is the Economics in Spatial Econometrics?," Working Papers 1101, University of Strathclyde Business School, Department of Economics.
  15. Guido Ascari & Valeria di Cosmo, 2005. "Determinants of total factor productivity in the italian Regions," SCIENZE REGIONALI, FrancoAngeli Editore, vol. 2005(2).
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