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. (authors' abstract)
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. (authors' abstract)
| Originalsprache | Englisch |
|---|---|
| Erscheinungsort | Vienna |
| Herausgeber | WU Vienna University of Economics and Business |
| Publikationsstatus | Veröffentlicht - 1 Nov. 2008 |