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

B. Fingleton, M. Fischer

Research output: Contribution to journalArticle

33 Citations (Scopus)

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 (Q J Econ 70:65-94, 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 et al. (The spatial economy. Cities, regions, and international trade. The MIT Press, Cambridge, 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.
LanguageEnglish
Pages467-491
Number of pages24
JournalAnnals of Regional Science
Volume44
DOIs
Publication statusPublished - 2010

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neoclassical theory
economic geography
regional difference
economic development
economics
panel data
international trade
world trade
wage
economy

Keywords

  • neoclassical theory
  • new economic geography
  • cross-regional
  • economic development

Cite this

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Neoclassical theory versus new economic geography: competing explanations of cross-regional variation in economic development. / Fingleton, B.; Fischer, M.

In: Annals of Regional Science, Vol. 44, 2010, p. 467-491.

Research output: Contribution to journalArticle

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