Working Paper
Market Size, Linkages, and Productivity

One account of spatial concentration focuses on productivity advantages arising from market size. We investigate this for 40 regions of Japan. Our results identify important effects of a region’s own size, as well as cost linkages between producers and suppliers of inputs. Productivity links to a more general form of ‘market potential’ or Marshall-Arrow-Romer externalities do not appear to be robust in our data. The effects we identify are economically quite important, accounting for a substantial portion of cross-regional productivity differences. A simple counterfactual shows that if economic activity were spread evenly over the 40 regions of Japan, aggregate output would fall by 5 percent.