Externalities, Cross-Sectoral Spillovers and Productivity Growth

Abstract

We provide an interpretation of the productivity dynamics in the manufacturing sector based on the idea of the thick market externality a la Diamond. An econometric model has been estimated which allows to disentangle the long run effects of these trading externalities from those of internal economies of scale and of aggregate industry-level economies. The results obtained—based on a cointegrated system of non-linear-error-correction equations—confirm the hypothesis that the trading externality matters. Moreover, our findings point out that the emphasis generally posited both on internal and external economies of scale is not justified.