Spatial externalities and empirical analysis: the case of Italy

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. The combination of increasing returns, market imperfections, and trade costs creates new forces that, together with factor endowments,determine the distribution of economic activities. Despite their theoretical relevance, there is still little evidence, especially at large scale level, on the effective contribution of these externalities to agents' location decisions. The aim of this work is to estimate a model of economic geography, using aspace-time panel data on Italian provinces, in order to both test the empirical relevance of this theory, and try to give a measure of the geographic extent of spatial externalities. Particular attention has been devoted to address rigorously those endogeneity issues that naturally arises when dealing with both structural models and spatial data. Our results are consistent with the hypothesis that product-market linkages, coming from increasing returns and trade costs, actually influence the geographic concentration of economic activities and that their spread over space is, contrary to previous findings, not negligible.