TESTING FOR CAUSALITY BETWEEN PRODUCTIVITY AND AGGLOMERATION ECONOMIES

ABSTRACT The productivity effects of agglomeration economies are often treated as endogenous in empirical work due to the potential for reverse causality. The extent to which these relationships are actually simultaneously determined, however, remains largely unobserved. This paper estimates panel data vector autoregressions for different sectors of the economy to test for bidirectional causality between productivity and both localization and urbanization economies. The aim is to address some key questions that will help to identify the extent of the endogeneity problem. Can we actually observe bidirectionality in the data? Does it feature more for some industries than for others? Is it more prevalent for localization or urbanization economies? The results show that agglomeration economies are not strictly unidirectional and that higher levels of productivity can induce growth in the scale of local urban and industrial environments. The paper discusses the difficulties that these issues pose for the estimation of agglomeration economies.     

HIGHWAY INFRASTRUCTURE INVESTMENT AND COUNTY EMPLOYMENT GROWTH: A DYNAMIC PANEL REGRESSION ANALYSIS*

ABSTRACT This paper uses recent advances in dynamic panel econometrics to examine the impact of highway infrastructure on aggregate county‐level employment using data for all 100 North Carolina counties from 1985 through 1997. Results are compared to models that do not take endogeneity of highway investment and dynamics of employment adjustment into account. Fully specified dynamic models are found to give insignificant results compared to these other models. Thus, when these issues are properly modeled, the results show that improvements in highways have no discernible impact on employment.