Agglomeration and the Italian North-South divide

This paper offers novel evidence on agglomeration economies by examining the link between total factor productivity (TFP) and employment density in Italy. TFP is estimated for a large sample of manufacturing firms and then aggregated at the level of Local Labor Market Areas (LLMAs). We tackle the endogeneity issues stemming from the presence of omitted co- variates and reverse causation with an instrumental variable (IV) approach that relies on histor- ical and geological data. Our estimate of the TFP elasticity with respect to the spatial concen- tration of economic activities is about 6%, a magnitude comparable to that measured for other developed countries. We find that the TFP-density nexus contributes to explaining a large share of the substantial productivity gap between the northern and southern regions of Italy. We also show that no significant heterogeneity emerges in the intensity of agglomeration economies across the country and that the positive TFP difference in favor of the firms located in the North is not due to the tougher competition taking place in those areas.