Estimation of total factor productivity for regions and sectors in Italy. A panel cointegration approach

In this paper a complete set of estimates of long-run production functions for 20 regions and 17 sectors in Italy is provided over the period 1970-1994. Our approach features two important aspects. First, this paper represents the first attempt to provide such a comprehensive set of estimates for the Italian economy. Moreover, we allow the estimated production functions for heterogeneity across sectors and regions. Secondly, on the basis of specific panel tests, we show that there is a considerable empirical evidence which suggests the presence of unit roots in our series; therefore, we apply panel cointegration tests to guard against the spurious regression problem and to detect longrun relationships. The technological levels of the northern regions result much higher than the southern ones, confirming the persistency of the North – South dualism in the Italian economy. Moreover, we find that factor elasticities highly differ across regions and sectors. This is an important result since most previous studies by employing unique national elasticities introduce a serious bias in the productivity comparisons.