Market Potential, Spatial Dependences and Spillovers in European Regions

Bruna F., Lopez-Rodriguez J. and Faina A. Market potential, spatial dependences and spillovers in European regions, Regional Studies. This paper reinterprets the new economic geography (NEG) ‘wage’ equation by distinguishing two different types of spatial dependences: a global spatial trend and local spatial autocorrelation. A measure of the variable Market Potential in this equation can capture both a global core–periphery pattern and spillovers, while the standard weights matrices of spatial econometrics tend to be designed to capture short-distance interactions among neighbours. Using cross-sectional European regional data, the paper compares different weighting schemes to build spatial lags. The estimation of spatial models of an NEG equation for gross value added per capita (GVApc) reveals new research challenges.