Regional variation in productivity: a study of the Danish economy Arnab Bhattacharjee Æ Eduardo de Castro Æ Chris Jensen-Butler Published online: 20 January 2009 Ó Springer Science+Business Media, LLC 2009 Abstract We develop a model of labor productivity as a combination of capital-labour ratio, vintage of capital stock, regional externalities, and total factor productivity (TFP). The skewness of TFP distribution is related to dif- ferent growth theories. While negative skewness is consistent with the neo-Schumpeterian idea of catching up with leaders, zero skewness supports the neoclassical view that deviations from the frontier reflect only idiosyncratic productivity shocks. We argue that positive skewness is consistent with an economy where exogenous technology is combined with non-transferable knowledge accumulated in specific sectors and regions. This argument provides the framework for an empirical model based on stochastic frontier analysis. The model is used to analyse regional and sectoral inequalities in Denmark. Keywords Regional growth models  Total factor productivity  Stochastic frontier analysis  Skewness  Technological trajectories JEL Classification D24  O18  O3  O4 1 Introduction Understanding the mechanisms underlying economic growth and the explanation of persistent geographical inequalities in levels of productivity are issues of key research interest. While prior research on growth theory has considerably improved our understanding of these issues, it has also generated substantial debate. On the one end of the spectrum there is the neoclassical position adopted by exogenous and endogenous (or new) growth theories. At the other end there are theories based on the Schumpeterian ideas of creative destruction and catching up with the leaders and related ideas represented in the evolutionary and institutionalist approaches. Like the literature on growth theories, the econometric literature on productivity has also developed several alternative approaches. The empirical models and infer- ence methods can be categorized into two key methodologies: (a) the OLS regression based approach and the associated interpretation of the Solow residual as a measure of total factor productivity (TFP), and (b) frontier production function estimation where the distance from the highest achievable levels of productivity is interpreted as a measure of productive efficiency. The OLS approach assumes zero skewness in the distribution of productivity; it supports the neoclassical concept of exogenous and ubiquitous technology and the resulting view that devia- tions from the production frontier, either positive or negative, reflect only idiosyncratic productivity shocks. By contrast, negative skewness of the distribution of TFP is consistent with the combination of neo-Schumpeterian and neoclassical approaches, where frontier technology is viewed as a pool of knowledge accumulated through the innovative action of leaders and available to any productive unit. However the capacity to use such technology depends The paper is dedicated to the fond and loving memory of Chris Jensen-Butler, who died while we were working on the paper. A. Bhattacharjee (&)  C. Jensen-Butler School of Economics and Finance, University of St. Andrews, Castlecliffe, The Scores, St. Andrews KY16 9AL, UK e-mail: ab102@st-andrews.ac.uk E. de Castro Department of Political Science and Public Administration, University of Aveiro, Aveiro, Portugal 123 J Prod Anal (2009) 31:195–212 DOI 10.1007/s11123-008-0128-0