Pecuniary Knowledge Externalities: Evidence from European Regions

The paper investigates the effects of agglomeration and specialization of technological activities on regional productivity growth,applying the notion of pecuniary knowledge externalities. The latter are indirect interdependencies between firms mediated by the price system. Pecuniary knowledge externalities enable to appreciate both the positive and negative effects associated with the regional concentration of knowledge generating activities. Our analysis leads to specify the hypothesis of an inverted U-shaped relationship between the agglomeration of innovation activities and productivity growth. The empirical investigation, based upon 138 European regions in the years 1996 through 2003, supports the hypothesis that agglomeration yields diminishing positive net effects beyond a maximum. The homogeneity of knowledge generating activities however reduces absorption costs and hence rises the net benefits at each agglomeration level.