Non-linear externalities in firm localization

Non-linear externalities in firm localization. Regional Studies. This paper presents a model of firm localization in which the intrinsic advantages of regions are disentangled from localized externalities, while this latter force is allowed to have a quadratic shape. Through inferential analysis, it is verified whether the quadratic component of localized externalities is statistically different from zero. Such a term can reflect more-than-linear positive feedbacks as well as congestion effects, so that the sign of the interdependencies stemming from localization is not assumed a priori to be positive. The main result is that the quadratic term is virtually never statistically different from zero across Italian sectors observed at the scale of commuting zones, so that localized externalities seem to be well approximated by a linear specification.