The paper investigates the effects of agglomeration and specialization of technological activities on regional productivity growth,applying the notion of pecuniary knowledge externalities. The latter are indirect interdependencies between firms mediated by the price system. Pecuniary knowledge externalities enable to appreciate both the positive and negative
effects associated with the regional concentration of knowledge generating
activities. Our analysis leads to specify the hypothesis of an inverted U-shaped
relationship between the agglomeration of innovation activities and productivity growth. The empirical investigation, based upon 138 European regions in the years 1996 through 2003, supports the hypothesis that
agglomeration yields diminishing positive net effects beyond a maximum. The
homogeneity of knowledge generating activities however reduces absorption
costs and hence rises the net benefits at each agglomeration level.