Market potential and productivity: Evidence from Finnish regions

New economic geography (NEG) stresses the role of various types of linkages as agglomeration forces. We show that a typical NEG model can be used to design an empirical methodology to assess whether linkages are relevant at all and, if so, whether they are more important for firms or workers in terms of productivity or amenity respectively. Applying the proposed methodology to Finnish NUTS 4 regions from 1977 to 2002, we find that linkages are indeed relevant and that firm-related demand and cost linkages are more important than worker-related cost-of-living linkages.