Estimating Verdoorn law for Italian firms and regions

Abstract

In empirical regional economics, returns to scale are typically estimated at the regional level in search for evidence on alternative theories of growth and agglomeration. However, returns to scale may also have a firm-level dimension. In this paper, we exploit micro level data and estimate the dynamic Verdoorn law in a multilevel-setting, where returns to scale are obtained simultaneously for the micro and the regional level. Using Italian firm-level data and the NUTS-3 level of aggregation, we estimate the classic and augmented versions ofVerdoorn lawfor the manufacturing sector, and the rest of the economy for comparison. Our results show that increasing returns to scale co-exist at both levels, with some degree of regional heterogeneity across the Italian peninsula.