Scale economies and industry agglomeration externalities: A dynamic cost function approach

Scale economies and agglomeration externalities are alleged to be important determinants of economic growth. TO assess these effects, we outline and e stimate a microfoundations model based on a dynamic cost function specifica tion. This model provides for the separate identification of the impacts of externalities avid cyclical utilization on short- and long-run scale econo mies and input substitution patterns. We find that scale economies are prev alent in U.S. manufacturing, cost savings and scale effects often attribute d to internal inputs may be due to external factors, and supply-side agglom eration effects are greater than demand-side, especially in the long run. ( JEL O47, E23).