Estimation of total factor productivity for regions and sectors in Italy. A panel cointegration approach

In this paper a complete set of estimates of long-run production functions for 20 regions and 17 sectors in Italy is provided over the period 1970-1994. Our approach features two important aspects. First, this paper represents the first attempt to provide such a comprehensive set of estimates for the Italian economy. Moreover, we allow the estimated production functions for heterogeneity across sectors and regions. This is particularly appropriate when analysing the Italian economy since the Italian regions have been experiencing fairly different and, in certain cases, divergent development paths. Secondly, on the basis of specific panel tests, we show that there is a considerable empirical evidence which suggests the presence of unit roots in our series; therefore, we apply panel cointegration tests to guard against the spurious regression problem and to detect long-run relationships. Evidence of long run relationships is found for most of the regions and the sectors on the basis of the cointegration tests; thus, the problem of spurious regressions is ruled out allowing us to offer rigorous inference on the estimation of regional production functions. We find that factor elasticities highly differ across regions and sectors. This is an important result since most previous studies by employing unique national elasticities introduce a serious bias in the productivity comparisons.