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Neoclassical theory versus new economic geography: competing explanations of cross-regional variation in economic development

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  • Bernard Fingleton

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  • Manfred Fischer

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Abstract

This paper uses data for 255 NUTS-2 European regions over the period 1995-2003 to test the relative explanatory performance of two important rival theories seeking to explain variations in the level of economic development across regions, namely the neoclassical model originating from the work of Solow (1956) and the so-called Wage Equation, which is one of a set of simultaneous equations consistent with the short-run equilibrium of new economic geography (NEG) theory, as described by Fujita, Krugman and Venables (1999). The rivals are non-nested, so that testing is accomplished both by fitting the reduced form models individually and by simply combining the two rivals to create a composite model in an attempt to identify the dominant theory. We use different estimators for the resulting panel data model to account variously for interregional heterogeneity, endogeneity, and temporal and spatial dependence, including maximum likelihood with and without fixed effects, two stage least squares and feasible generalised spatial two stage least squares plus GMM; also most of these models embody a spatial autoregressive error process. These show that the estimated NEG model parameters correspond to theoretical expectation, whereas the parameter estimates derived from the neoclassical model reduced form are sometimes insignificant or take on counterintuitive signs. This casts doubt on the appropriateness of neoclassical theory as a basis for explaining cross-regional variation in economic development in Europe, whereas NEG theory seems to hold in the face of competition from its rival.
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Suggested Citation

  • Bernard Fingleton & Manfred Fischer, 2010. "Neoclassical theory versus new economic geography: competing explanations of cross-regional variation in economic development," The Annals of Regional Science, Springer;Western Regional Science Association, vol. 44(3), pages 467-491, June.
  • Handle: RePEc:spr:anresc:v:44:y:2010:i:3:p:467-491
    DOI: 10.1007/s00168-008-0278-z
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    Citations

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    Cited by:

    1. Uwe Neumann & Rüdiger Budde & Christoph Ehlert, 2012. "Urban Economic Growth in Europe Between 2001 and 2008 – Gravitation or Dispersion?," Ruhr Economic Papers 0384, Rheinisch-Westfälisches Institut für Wirtschaftsforschung, Ruhr-Universität Bochum, Universität Dortmund, Universität Duisburg-Essen.
    2. Andrzej Cieślik & Bartłomiej Rokicki, 2016. "European Integration and Spatial Wage Structure in Poland," Tijdschrift voor Economische en Sociale Geografie, Royal Dutch Geographical Society KNAG, vol. 107(4), pages 435-453, September.
    3. Justin Doran & Declan Jordan, 2013. "Decomposing European NUTS2 regional inequality from 1980 to 2009: National and European policy implications," Journal of Economic Studies, Emerald Group Publishing, vol. 40(1), pages 22-38, January.
    4. Henryk Gurgul & Lukasz Lach, 2011. "The impact of regional disparities on economic growth," Operations Research and Decisions, Wroclaw University of Technology, Institute of Organization and Management, vol. 2, pages 17-43.
    5. Badi H. Baltagi & Bernard Fingleton & Alain Pirotte, 2014. "Estimating and Forecasting with a Dynamic Spatial Panel Data Model," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 76(1), pages 112-138, February.
    6. Philipp vom Berge, 2013. "Search unemployment and new economic geography," The Annals of Regional Science, Springer;Western Regional Science Association, vol. 50(3), pages 731-751, June.
    7. Cazzuffi, Chiara & Pereira-López, Mariana & Soloaga, Isidro, 2017. "Local poverty reduction in Chile and Mexico: The role of food manufacturing growth," Food Policy, Elsevier, vol. 68(C), pages 160-185.
    8. Ceren Ozgen & Peter Nijkamp & Jacques Poot, 2010. "The effect of migration on income growth and convergence: Meta-analytic evidence," Papers in Regional Science, Wiley Blackwell, vol. 89(3), pages 537-561, August.
    9. Manfred Fischer, 2011. "A spatial Mankiw–Romer–Weil model: theory and evidence," The Annals of Regional Science, Springer;Western Regional Science Association, vol. 47(2), pages 419-436, October.
    10. Wako, Hassen, 2016. "Aid, institutions and economic growth: Heterogeneous parameters and heterogeneous donors," MERIT Working Papers 009, United Nations University - Maastricht Economic and Social Research Institute on Innovation and Technology (MERIT).
    11. Roberts, Mark & Deichmann, Uwe & Fingleton, Bernard & Shi, Tuo, 2010. "On the road to prosperity ? The economic geography of China's national expressway network," Policy Research Working Paper Series 5479, The World Bank.
    12. Rhydian James & Peter Midmore & Dennis Thomas, 2012. "Public Sector Size and Peripherality," Spatial Economic Analysis, Taylor & Francis Journals, vol. 7(4), pages 447-460, December.
    13. repec:zbw:rwirep:0384 is not listed on IDEAS
    14. Manfred M. Fischer, 2009. "Regions, Technological Interdependence And Growth In Europe," Romanian Journal of Regional Science, Romanian Regional Science Association, vol. 3(2), pages 1-17, DECEMBER.
    15. Fernando Bruna, 2015. "Why do empirical tests tend to accept the NEG? An alternative approach to the 'wage equation' in European regions," Working Papers 15-11, Asociación Española de Economía y Finanzas Internacionales.
    16. Neumann, Uwe & Budde, Rüdiger & Ehlert, Christoph, 2012. "Urban Economic Growth in Europe Between 2001 and 2008 – Gravitation or Dispersion?," Ruhr Economic Papers 384, RWI - Leibniz-Institut für Wirtschaftsforschung, Ruhr-University Bochum, TU Dortmund University, University of Duisburg-Essen.

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    Keywords

    C33; O10;

    JEL classification:

    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models
    • O10 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - General

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