Solow Residual Approach to Inter-regional Network Economies

Abstract

This chapter reevaluates inter-regional network economies in Japan based on cost-based Solow residuals, a novel analytical approach. In most studies, inter-regional network economies have been measured as elements of technological progress in production functions. However, the conventional approach based on perfect competition raises concerns that measurements of geographical externalities depend on the behavior of economic agents. One way to mitigate this concern is to construct a model based on imperfect competition. The cost-share Solow residual approach provides reliable evidence of the geographical externalities uncovered by the conventional approach. That is, by applying this approach to geographical analysis, we can precisely identify inter-regional network economies under imperfect economies. Furthermore, by using this approach, we perform a sensitivity analysis on the installation of the Linear-Chuo Shinkansen (magnetic levitation train) to measure the economic impact of high-quality transportation infrastructure. The results show that the Linear-Chuo Shinkansen provides a significant time-saving effect not only in the region of origin but also in local regions other than those along the railway lines. That is, the results reveal that the formation of inter-regional networks can increase productivity not only in large metropolitan areas but also in local areas. The results of this chapter suggest that inter-regional networks via high-quality transportation infrastructure significantly enhance regional economic performance. This chapter provides empirical evidence for the national land plan in Japan.