How to Measure the Unobservable: A Panel Technique for the Analysis of TFP Convergence

Abstract

This paper proposes a fixed-effect panel methodology based on Islam (2000) to assess the existence of technology convergence across the Italian regions between 1963 and 1993. Our results find strong support to both the presence of TFP heterogeneity across Italian regions and to the hypothesis that TFP convergence has been a key factor in the process of aggregate regional convergence observed in Italy up to the mid-seventies. However, this period of TFP convergence has not generated a significant, persistent decrease in the degree of cross-region inequality in per capita income. Finally, our human capital measures has been found to be highly positively correlated with TFP levels. This evidence confirms one of the hypothesis of the Nelson and Phelps approach, namely that human capital is the main determinant of technological catch-up. Our results are robust to the use of different estimation procedure such as simple LSDV, Kiviet-corrected LSDV, and GMM à la Arellano and Bond (1991). To the best of our knowledge, this is the first time that evidence on TFP convergence across Italian regions has been produced in a context in which the traditional Solovian-type of convergence is simultaneously taken into account.We gratefully acknowledge financial support from MIUR Cofin "I fattori che influenzano i processi di crescita economica e di convergenza tra le regioni europee". We would like to thank

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