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Chapter 19: Regional Growth and Convergence: Heterogeneous Reaction versus Interaction in Spatial Econometric Approaches
19 Regional growth and convergence: heterogeneous reaction versus interaction in spatial econometric approaches Cem Ertur and Julie Le Gallo Notwithstanding the general rule that ‘everything aﬀects everything else’, it is often useful to assess whether the dominant eﬀects are caused by reaction to external forces or by interaction between (neighbouring) individuals. (Cliﬀ and Ord, 1981, p. 141) 19.1 Introduction Over the last few years, numerous studies have been carried out to analyze economic convergence among countries or regions, recognizing at the same time the need to include spatial eﬀects (Abreu et al., 2005; Ertur et al., 2006; Fingleton and López-Bazo, 2006). For example, a large number of contributions analyzing the ␤-convergence hypothesis impose strong homogeneity assumptions on the cross-economy growth process, since each economy is assumed to have an identical aggregate production function. However, modern growth theory suggests that diﬀerent economies should be described by distinct production functions. In other words, ␤-convergence models should account for parameter heterogeneity (Brock and Durlauf, 2001; Durlauf, 2001; Durlauf et al., 2005; Temple, 1999). Evidence of parameter heterogeneity has been found in non-spatial models using diﬀerent statistical methodologies, such as in Canova (2004), Desdoigts (1999), Durlauf and Johnson (1995) and Durlauf et al. (2001). Each of these studies suggests that the assumption of a single linear statistical growth model applying to all countries or regions is incorrect. Moreover, Ertur et al. (2007) argue that in a spatial context, similarities in legal and social institutions, as well as culture...
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