The spatial evolution of economic activities: from theory to estimation

Abstract: This paper studies the evolution of economic activities using a continuous time-space aggregation-diffusion model, which encompasses competing effects of agglomeration and congestion. To bring the model to the real data, a novel discretization technique over time and space is introduced. This technique effectively disentangles spatial effects into pure topography, agglomeration, repulsion, and diffusion forces, which is crucial for developing robust econometric methods in spatial economics. Our empirical analysis of personal income across Italian municipalities from 2008 to 2019 validates the model's primary predictions and demonstrates superior performance compared to the most common spatial econometric models in the literature.