This study aims to empirically investigate the determinants of service industry productivity, such as economies of scale and economies of density. By using establishment-level data related to personal service industries in Japan, the study estimates the production functions for both value-added and physical output measures. In almost all the service industries examined, significant economies of scale and economies of density are observed, wherein productivity increases by 7% to 15% when the municipality population density doubles. These findings are confirmed by an estimation in which the measures of physical output are considered instead of value added.

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