Spatial agglomeration and productivity in Italy: a panel smooth transition regression approach

The paper analyzes the impact of localization, urbanization and competition on firm-level TFP, using a large sample of Italian firm-level data from 1999 to 2007. In particular, the paper explores the nonlinearities of such effects, accounting for the possible presence of critical masses and/or congestion effects. We adopt a panel smooth transition regression model, so that the TFP elasticities are free to vary smoothly across two or more extreme values. Results show that localization economies and Jacobian externalities materialize only for values of, respectively, intra-industry spatial agglomeration and extra-sectoral local diversity above a certain threshold. Data instead shows no evidence of significant diseconomies. As for competition, we find a positive impact of local competition on productivity, even though such impact shrinks at high levels of competition.