Working Paper No. 725 - Problems with Regional Production Functions and Estimates of Agglomeration Economies - A Caveat Emptor for Regional Scientists

Sep 18, 2026

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Mainstream economists increasingly apply spatial economics tools, especially the aggregate production function, to regional growth questions. This paper argues that aggregating microproduction functions into an aggregate production function requires overly stringent conditions, so the aggregate object likely does not exist. Reported empirical goodness of fit is attributed to value-data usage and an accounting identity, meaning parameter estimates cannot be treated as evidence about the spatial economy’s true technology, including substitution elasticity, returns to scale, or technical progress.

LanguageEnglish

CategoryResearch & Report

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Pages32

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ABSTRACT

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1. INTRODUCTION

Working Paper No. 725 Problems with Regional Production Functions and Estimates of Agglomeration Economies: A Caveat Emptor for Regional Scientists by Jesus Felipe Levy Economics Institute of Bard College Asian Development Bank John McCombie* Cambridge Centre for Economic and Public Policy May 2012 * Correspondence: John McCombie, Director, Cambridge Centre for Economic and Public Policy, Department of Land Economy, University of Cambridge, UK; [jslm2@cam.ac.uk. The views](jslm2@cam.ac.uk. The views) in this paper represent solely those of the authors, and not those of the Asian Development Bank, its member countries, or its executive directors. The Levy Economics Institute Working Paper Collection presents research in progress by Levy Institute scholars and conference participants. The purpose of the series is to disseminate ideas to and elicit comments from academics and professionals. Levy Economics Institute of Bard College, founded in 1986, is a nonprofit, nonpartisan, independently funded research organization devoted to public service. Through scholarship and economic research it generates viable, effective public policy responses to important economic problems that profoundly affect the quality of life in the United States and abroad. Levy Economics Institute P.O. Box 5000 Annandale-on-Hudson, NY 12504-5000 [http://www.levyinstitute.org](http://www.levyinstitute.org) Copyright © Levy Economics Institute 2012 All rights reserved ISSN 1547-366X ABSTRACT Over the last 20 years or so, mainstream economists have become more interested in spatial economics and have introduced largely neoclassical economic concepts and tools to explain phenomena that were previously the preserve of economic geographers. One of these concepts is the aggregate production function, which is also central to much of regional growth theory. However, as Franklin Fisher, inter alios, has shown, the conditions necessary to aggregate microproduction functions into an aggregate production function are so stringent that in all probability the aggregate production function does not exist. This paper shows that the good statistical fits commonly found empirically are solely due to the use of value data and an underlying accounting identity. The result is that the estimates obtained cannot be regarded as providing evidence of the underlying technological structure of the spatial economy, including the aggregate elasticity of substitution, the degree of returns to scale, and the rate of technical progress. Keywords: Accounting Identity; Agglomeration Economies; Regional Aggregate Production Functions JEL Classifications: B50, O4, R11 1. INTRODUCTION The last twenty years or so have seen analytical tools of mainstream neoclassical economics being increasingly applied to analyzing economic geography. There has been an ongoing lively debate between the “new” geographical economists and the economic geographers about the most appropriate methodology for modeling the space economy (Martin 1999; Garretson and Martin 2010) . Economic geographers, such as Storper (2011), while criticizing the assumption of general equilibrium inherent in the New Economic Geography, see the way forward as being a rapprochement between the economic geographers and the New Economic Geography. This is reflected, for example, in the 2006 symposium in the Journal of Economic Geography, reflecting “agglomeration and growth: a dialogue between economists and geographers”(Duranton and Storper 2006) . Nevertheless, the Regional Political Economy approach rejects the whole methodological stance of neoclassical economics from the perspective of Marx, Kalecki, and Sraffa (Sheppard and Barnes 1990; Sheppard 2000) . The purpose of this paper is not to discuss the deep methodological issues that still remain, but to present a warning about the uncritical acceptance of a central concept in neoclassical economics that is being widely used in spatial eco

FAQs

What central concept does the paper warn against in spatial economics?

It warns against the uncritical acceptance of the aggregate production function as a central neoclassical concept used widely in spatial economics.

Why does the paper question the existence of the aggregate production function?

Because the conditions needed to aggregate microproduction functions into an aggregate production function are described as so stringent that it likely does not exist.

What does the paper say explains the often-good empirical statistical fits?

The paper attributes the good fits to the use of value data and an underlying accounting identity, not to evidence about the true technological structure.

Sep 18, 2026

Uploaded by Jake