Static and dynamic externalities, industry composition, and state labor productivity: A panel study of states

Endogenous growth models have reignited interest in regional economic growt h. Recent regional growth studies focus on dynamic externalities related to localization and urbanization economies. Yet, these studies typically atte mpt to observe externality-induced productivity effects indirectly through examination of employment growth. Also, issues of regional differences in c oncentrations of nationally productive industries and distinguishing betwee n static and dynamic externalities have received little attention. This stu dy directly relates measures of externalities to productivity differences, decomposing them into those due to differences in industry composition and those due to average productivity differences in each industry. A two-step procedure is used to distinguish static from dynamic externalities.