Regional Studies

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The impact of regional inequality on economic

growth: a spatial econometric approach

Domenica Panzera & Paolo Postiglione

To cite this article: Domenica Panzera & Paolo Postiglione (2022) The impact of regional
inequality on economic growth: a spatial econometric approach, Regional Studies, 56:5,
687-702, DOI: 10.1080/00343404.2021.1910228

To link to this article: https://doi.org/10.1080/00343404.2021.1910228

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REGIONAL STUDIES
2022, VOL. 56, NO. 5, 687–702
https://doi.org/10.1080/00343404.2021.1910228

The impact of regional inequality on economic growth: a spatial

econometric approach
Domenica Panzeraa and Paolo Postiglioneb

ABSTRACT
This paper investigates the relationship between economic growth and regional income inequality in a spatial
econometric perspective. The role of space in the measure of inequality is discussed, and a new theoretical model that
relates inequality with economic growth is introduced. The proposed model extends a spatial Mankiw–Romer–Weil
specification by introducing regional income inequality as a determinant of economic growth. The measure of
inequality proposed as a covariate in the model is derived by a spatial decomposition of the Gini index. An empirical
analysis focused on European Union NUTS-2 regions is carried out to illustrate the model.
KEYWORDS
regional disparities; economic convergence; spatial analysis; European Union NUTS-2 regions

JEL C31, D63, O47, O52

HISTORY Received 9 February 2019; in revised form 17 March 2021

INTRODUCTION derived a positive relationship (Forbes, 2000; Li & Zou,

There is a body of literature examining the relationship
between inequality and economic growth. Using individual
income data, the impact of inequality on growth perform-
ances has been mainly investigated through cross-sectional
growth regressions, where the average growth rate of
income per capita is regressed on initial inequality and sev-
eral other control variables (Alesina & Rodrik, 1994; Pers-
son & Tabellini, 1994). Using cross-section analysis, Chen
(2003) assessed the existence of an inverted ‘U’-shaped
relationship between initial income distribution and long-
run economic growth. Using panel data, Li and Zou
(1998) and Forbes (2000) proposed fixed-effects estimates.
Fixed-effects and generalized method of moments (GMM)
estimations of the relationship between inequality and
growth have been performed by Panizza (2002). An
attempt to separate long- and short-run influences of
inequality on growth has been made by Partridge (2005).
Depending on the data and the methodologies used, the
empirical literature reported conflicting results about the
effects of inequality on economic growth. A negative impact
of inequality on growth has been mainly supported by
empirical cross-country studies (Alesina & Rodrik, 1994;
Persson & Tabellini, 1994), while several other studies
1998). Panizza (2002) found a negative relationship between
inequality and growth, which, however, is not robust to
small changes in data or econometric specifications.
A different approach has been proposed in some con-
tributions focused on regional disparities, their determi-
nants, and their relations with growth and the level of
economic development (Lessmann, 2014; Lessmann &
Seidel, 2017; Petrakos et al., 2005). Furthermore, the
inequality in the distribution of economic activities has
been linked to both geographical characteristics and vari-
ables related to the level of development by Henderson
et al. (2018).
The need to assess the impact of inequality on growth
in a spatial perspective has been highlighted in the recent
literature (Martino & Perugini, 2008; Rey & Janikas,
2005). Along this research line, Janikas and Rey (2008)
proposed a spatial analysis that allows for simultaneous
interactions between regional growth and inequality. A
spatially augmented model which allows intra-regional
disparities to be one of the determinants of regional econ-
omic growth has been proposed by De Dominicis (2014).
Following these contributions, in this paper we intro-
duce a new theoretical growth model that relates economic
growth with regional inequality in a spatial perspective.

CONTACT
a
(Corresponding author) domenica.panzera@unich.it
Department of Economic Studies, ‘G. d’Annunzio’ University of Chieti-Pescara, Pescara, Italy.
b
postigli@unich.it
Department of Economic Studies, ‘G. d’Annunzio’ University of Chieti-Pescara, Pescara, Italy.

© 2021 The Author(s). Published by Informa UK Limited, trading as Taylor & Francis Group
This is an Open Access article distributed under the terms of the Creative Commons Attribution-NonCommercial-NoDerivatives License (http://creativecommons.org/licenses/by-
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built upon in any way.
688 Domenica Panzera and Paolo Postiglione
Based on the spatially augmented Mankiw–Romer–Weil
(MRW) (Mankiw et al., 1992) model introduced by
Fischer (2011), the proposed specification allows the
impact of regional inequality on the growth process to
be assessed. The model includes a regional inequality
measure as a covariate. This measure is derived by the
spatial decomposition of the Gini index introduced by
Rey and Smith (2013). In addition to verifying the impact
of inequality on growth in a regional economy, the pro-
posed model allows the extent to which regional growth
is influenced by inequality in neighbouring regions to be
assessed.
Our approach is different in some important aspects
from De Dominicis (2014), who also investigated this
issue. First, while the theoretical model developed by De
Dominicis is based on the specification given in Ertur
and Koch (2007), our model extends the framework pro-
posed by Fischer (2011).
Besides, our approach defines a theoretical model
where the impact of human capital on growth is explicitly
considered. Conversely, in De Dominicis (2014), the
impact of human capital is only empirically estimated
without any theoretical implication. For this reason, our
theoretical model can be considered as a methodological
extension of the De Dominicis approach.
Finally, while De Dominicis (2014) considered the
within component of the Theil index (Theil, 1967)
as a measure of regional inequality, we use the within
component of the Gini index and its spatial decompo-
sition proposed by Rey and Smith (2013). Specifically,
we introduce as an inequality variable in our model
the non-spatial component of the within-region
inequality, which expresses the component of intra-
regional inequality that is not influenced by the spatial
interactions among regional units. This definition allows
us to consider the idiosyncratic component of inequality,
isolating the spatial component of intra-regional
inequality whose impact could alter the real effect of
inequality on regional growth.
The proposed model is illustrated through an empirical
analysis focused on European Union (EU) NUTS-2
regions over the period 2003–16. EU regions represent
interesting units of analysis. In fact, the persistence of
inequalities across EU regions, exacerbated by the global
financial crisis, requires the definition of regional policies
aimed at enhancing growth and regional equity. Most of
the EU funds and programmes are specifically delivered
for less developed regions to promote the convergence of
these regions toward the richer ones. Considering the
relationship between inequality and growth facilitates the
assessment of the role that disparities within regional
economies play in the convergence process. Within-region
disparities could thus become a variable on which regional
policies could be targeted to promote growth and conver-
gence. The introduction of spatial effects in the analysis
entails considering both spatial similarities and instabil-
ities across space, facilitating a study of disparities and
reduction policies more anchored to the characteristics of
the spatial units under consideration.
REGIONAL STUDIES
Accounting for the peculiarities of regional economies
could offer useful insights into the major socioeconomic
trends that have interested the EU in recent decades. In
fact, the higher internal disparities characterizing the
new accession member states could impact on their
catch-up process toward more developed regional econ-
omies. Assessing such dynamics also offers useful indi-
cations to address policies targeted to different regional
contexts.
The rest of the paper is organized as follows. Next, we
discuss the general theoretical growth model and our spe-
cification. We then present an empirical application con-
cerning European NUTS-2 regions. Finally, we provide
some concluding remarks and future research agenda.
A THEORETICAL MODEL OF ECONOMIC
GROWTH
Analysing the relationship between regional inequality and
economic growth in a spatial perspective requires an
appropriate model specification. In fact, regional growth
could be influenced by inequality within the regional econ-
omy as well as by inequality in neighbouring regions. This
spatial dependence effect is so included in the proposed
model that we derive theoretically.
Our model specification is obtained as an extension of
the spatial MRW model developed by Fischer (2011).
However, while Fischer considers as the dependent vari-
able in the model the level of regional gross domestic pro-
duct (GDP) at the end of the period, we focus on the GDP
growth rate, testing for the b-convergence hypothesis.
In our proposal, the spatially augmented MRW is
modified by introducing a measure of regional inequality
among the covariates. Specifically, as in De Dominicis
(2014), in our model the investment in physical capital is
expressed as a function of inequality. This assumption
allows the impact of inequality on growth to be assessed,
and is based upon the idea that higher inequality among
regions stimulates higher investments from richer regions.
Moreover, according to standard economic theories, sav-
ing and investment are assumed to be identical and is a
fairly typical result that the redistribution of resources
from rich to poor tends to lower the aggregate rate of sav-
ing in an economy (Thorbecke & Charumilind, 2002).
This argument found support in Kaldor (1956) who high-
lighted that a high initial inequality of income favours high
saving, because of the higher propensity to save that rich
people have with respect to poor people and, thus, it
stimulates higher capital accumulation. On the same
line, Galor (2000) argues that high income inequality
has a positive impact on savings, resulting in a higher
physical capital accumulation. Furthermore, a positive
relationship between inequality and aggregate saving has
been recently reported by Koo and Song (2016) who
found a greater and statistically more significant effect
for richer and more developed countries.
In this paper we assume that each regional economy is
characterized by a Cobb–Douglas production function
 The impact of regional inequality on economic growth: a spatial econometric approach 689

that, for region i at time t, is specified as follows: , wij , is such that 0 ≤ wij ≤ 1, with wij = 0 for i = j,
of W 
j=1 wij = 1. For regions that are neighbours of
N
aC − aH
and
Yit = Ait CitaC HitaH L1−
it (1) region i, wij . 0, for i, j = 1, 2, . . . , N .
The dynamic equations for physical capital per worker
where Y is the output; A is the level of technology; C is the
and human capital per worker (equations 2 and 3) become:
physical capital; H is the human capital; and L is the
labour. The exponents aC and aH are the output elastici- ċit = siC yit − (d + ni )cit (6)
ties with respect to physical capital and human capital,
respectively. These output elasticities are positive con- ḣit = siH yit − (d + ni )hit (7)
stants (i.e., aC , aH . 0) such that aC + aH , 1, hence
the production function has decreasing returns to both Besides, we assume that the fraction of output that is
types of capital. invested in physical capital is a function of a measure of
Denoted by siC and siH , which are the fractions of out- inequality, that is, siC = f (Gi ) = Ineqi , where Gi is a
put Yit invested in physical capital and human capital, measure of inequality for region i. This assumption implies
respectively; and by d, which is a rate of depreciation that higher inequality among regions should stimulate
that is assumed to be constant and identical for both phys- higher investments from richer regions.
ical and human capital, the dynamic equations for C and Following this assumption, equation (6) can be rewrit-
H are given by: ten as:
ċit = Ineqi yit − (d + ni )cit (8)
Ċ it = siC Yit − dCit (2)
Equations (8) and (7) imply that the physical capital out-
Ḣ it = siH Yit − dHit (3) put and human capital output are constant so that:
where the dots over the variables indicate their time- ci∗ Ineqi
= (9)
derivatives. The dynamic equation for labour and technol- yi∗ (d + g + ni )
ogy are L̇it = ni Lit and Ȧ it = gAit , where ni is the working
population growth rate; and g is a constant growth rate for h∗i siH
∗ = (10)
technology. Now define the per worker quantities for out- yi (d + g + ni )
put, physical capital and human capital as yit = Yit /Lit ,
cit = Cit /Lit and hit = Hit /Lit , respectively. The pro- where the asterisk denotes the steady-state value of the
duction function (1) in per worker terms becomes: variable. The steady-state conditions for the physical capi-
tal and human capital variables can be derived by equations
yit = Ait citaC haitH (4) (9) and (10), respectively. Substituting these expressions in
equation (4) and taking the logarithm, after some algebra,
Introducing spatial externalities, the level of technology, we obtain:
for each region i, is expressed as follows:
1 aC + fC aH + fH H


n lnyi∗ = lnVt + lnIneqi + lnsi
Ait =
f f
Vt cit C hit H
gw
A jt ij (5) 1−h 1−h 1−h
j=1
h aC 
N
− ln(d + g + ni ) − g wij lnIneqi
According to equation (5), the function Ait depends on 1−h 1 − h j=1
four terms. The first term, Vt , represents the proportion
of technological progress that, by assumption, is exogen- aH 
N
aC + aH
− g wij lnsjH + g
ous and identical for all regions. It is defined by 1 − h j=1 1−h
Vt = V0 et , where t is the exogenous technological pro-
gress growth rate; and V0 is its initial level. The next 
N
1 − aC − aH  N

two terms imply that the level of technology for each wij ln (d + g + nj ) + g wij lnyj∗
j=1
1−h j=1
region i depends on both the level of physical capital per
worker, cit , and the level of human capital per worker, (11)
hit . This implies that investments in both physical and where h = aC + aH + fC + fH . In order to define the
human capital increase not only capital stocks but also convergence of output per worker in a given region to
the level of technology through knowledge spillovers. the region’s steady-state value, we consider a log-lineariza-
The strength of these externalities is determined by the tion of equations (8) and (7) around steady states, which
parameters fC , with 0 ≤ fC , 1, and fH , with lead to a system of linear differential equations that can
0 ≤ fH , 1, respectively. The last term implies that the be solved by using the technique developed by Ertur and
level of technology of region i also depends on the level Koch (2007). Postulating that the gap of region i relative
of technology of its neighbour regions j, to its own steady state is proportional to the corresponding
for j = 1, 2, . . . , N . The degree of technological interde- gap for region j, it follows that:
pendence among regions depends on the scalar parameter
g, with 0 ≤ g , 1, and on the proximity between regions dlnyit
= g − li [lnyit − lnyi∗ ] (12)
that is summarized by the matrix W . The (i, j)-th element dt

REGIONAL STUDIES
690 Domenica Panzera and Paolo Postiglione

where g denotes the constant growth rate of physical and aC + aH  N

human capital; and li is the speed of convergence. Solving +(1 − eli t ) g wij ln(d + g + nj )
1−h j=1
equation (12) for lnyit , and subtracting from both sides the
output per worker at some initial date, lnyi0 , we obtain the 1 − aC − aH  N
1
following expression, written in a matrix notation: + (1 − eli t ) g wij (lnyit − lnyi0 )
1−h j=1
1 − eli t

G = gt i − Dy0 + Dy∗ (13) (16)

where:
where G = yt − y0 , with yt the N × 1 vector of logarithms
of output per worker at time t; and y0 the N × 1 vector of N
wij 1 − eli t
Di = gt − rgt(1 − eli t ) + lnVt .
logarithms of the initial level of output per worker, i is a j=1
1−e j
l t 1−h
N × 1 vector of ones, D is a N × N diagonal matrix with
(1 − eli t ) elements on the main diagonal, and y∗ is the Equation (16) states that the growth rate of output per
N × 1 vector of logarithms of output per worker at steady worker, in region i, depends negatively on its initial
state. Following the rationale of Ertur and Koch (2007), level, positively on inequality and on human capital
rewriting equation (11) in a matrix notation we have: investment rate, and negatively on the population
growth rate. The growth rate of output per worker in
 region i also depends on the same variables in the neigh-
1 aC + fC aH + fH
y∗ = (I − rW )−1 V+ In + S bouring regions j, identified by wij . 0, because of tech-
1−h 1−h 1−h
 nological interdependence (Ertur & Koch, 2007).
aC g aH g Specifically, it is negatively influenced by inequality
− WIn − WS
1−h 1−h and human capital investment rate in neighbouring
(14) regions and is positively influenced by their working
population growth rate. As a further evidence in
g(1 − aC − aH ) equation (16), the initial level of output per worker in
where r = , In and S are the N × 1 vectors neighbouring regions has a positive influence on the
1−h
of the logarithms of inequality measures and saving rates of growth rate of output per worker in region i. Finally,
human capital (i.e., lnsiH ), respectively, divided by the effec- the last term in equation (16) represents the rate of
tive rate of depreciation (i.e., by ln(d + g + ni )). Substitut- growth of output per worker in the neighbour regions
and reflects the spatial autocorrelation process that is
ing (14) in (13), and pre-multiplying both sides by the
implied by the technological interdependence.
inverse of D(I − rW )−1 , after rearranging terms, we
obtain:
MODEL SPECIFICATION
1 −1
G = gt i − rgtDW D i + DV
1−h The inequality variable
aC + fC aH + fH Our approach represents an extension of the spatial MRW
− Dy0 + DIn + DS + rDW y0 introduced by Fischer (2011), where an inequality measure
1−h 1−h
aC g aH g is included among the explanatory variables. In our model
− DWIn − DWS − rDW D−1 G specification the inequality variable expresses the intra-
1−h 1−h
regional inequality, that is, the level of internal inequality
(15) characterizing each regional unit.
Specifically, in our proposal we define and use an
Equation (15) can be rewritten for region i as follows: inequality index that is based on the non-spatial com-
ponent of the within-region Gini index.
aC + fC The Gini index G can be decomposed in three terms,
lnyit −lnyi0 = Di − (1 − eli t )lnyi0 + (1 − eli t ) lnIneqi
1−h such as the within-region inequality Gwithin , the
aH + fH H h between-region inequality Gbetween , and a residual or
+(1 − eli t ) lnsi − (1 − eli t ) ln(d + g + ni ) interaction term R (Mookherjee & Shorrocks, 1982;
1−h 1−h
Shorrocks & Wan, 2005). While the between-group
1 − aC − aH  N
component captures the interregional inequality, and
+(1 − eli t ) g wij lny j0
1−h j=1
thus measures the distance between the average GDP
of each region, the within-group term expresses the dis-
aC  N tance between the GDP values observed for spatial units
− (1 − eli t ) g wij lnIneqj that belong to the same region. The latter component
1 − h j=1
thus expresses the inequality in each regional economy
aH  N and could be assumed as influencing the economic
− (1 − eli t ) g wij lnsjH growth rate in each region (see also De Dominicis,
1 − h j=1
2014).

REGIONAL STUDIES
 The impact of regional inequality on economic growth: a spatial econometric approach 691

Considering N NUTS-2 regions labelled as & Smith, 2013). According to this interpretation, the
i = 1, 2, . . . , N with respective mean income and popu- NNGi component could be considered as the spatial com-
lation share mi and pi , the within-term of the Gini index ponent of Gi , which changes in the same direction as the
can be expressed as: positive spatial autocorrelation relationship. The non-
spatial component of inequality can be thus identified

N
mi and measured by the NGi component. The identification
Gwithin = p2i Gi (17)
i=1
m of the spatial and non-spatial components of inequality
allows a better understanding of the phenomenon and
where m represents the mean of the overall income distri- can offer useful insights for assessing the impact of
bution; and Gi is the Gini index for region i. The index in inequality on regional growth.
(17) represents a kind of average of the inequality values Equation (17) can be thus rewritten as:
within each regional unit, and is fully specified by infor-
mation about population share, mean income and inequal- 
N
mi N
m
Gwithin = p2i NGi + p2i i NNGi
ity values. m m
i=1 i=1
To compute the Gini index Gi for each NUTS-2
region i, it is needed to consider the value of income yl = NGwithin + NNGwithin (20)
of each l NUTS-3 sub-region that belongs to the specific where NGi and NNGi indicate the neighbour and non-
NUTS-2 region i, with l = 1, 2, . . . , Mi . The Gini neighbour components, respectively, of the Gini index
index Gi is thus defined as: within region i, with i = 1, 2, . . . , N . In our model we
Mi Mi consider, for each region i, the non-spatial inequality
|yl − yz | m
Gi = l=1 z=12 (18) (Ineqi = p2i i NGi , the summands of the first term on
2Mi yi m
the right side of equation 20). Since population-weighted
where: inequality indices are considered, instead of assuming the
GDP per worker as representative of the whole region, we
 Mi
yi = y /Mi . account for how many individuals this GDP per worker
l=1 l represents (Mookherjee & Shorrocks, 1982). Hence,
To define our measure of inequality, we apply the weighting by population facilitates accounting for regional
spatial decomposition of the Gini index into its neighbour sizes that, especially in the European context, present rel-
and non-neighbour components introduced by Rey and evant differences (Portnov & Felsenstein, 2010). This
Smith (2013). Other contributions in this direction have approach also appears consistent with the approach pro-
been proposed by Arbia (2001), Márquez et al. (2019) posed by De Dominicis (2014), which quantifies intra-
and Panzera and Postiglione (2020). regional inequality in the EU using the within component
Denoted by vlz , the generic element of the spatial of the Theil index that implicitly includes the weighting by
weight matrix V , which summarizes the proximity population.
between the spatial units at NUTS-3 level, the Gini The non-neighbour component introduced in the
index in (18) can be expressed as follows (Rey & Smith, model represents the component of inequality that is not
2013): influenced by spatial autocorrelation in the GDP values.
 Mi  Mi However, the spatial interactions among regional econom-
vlz |yl − yz | ies are included in the model by considering the spatial lag
Gi = l=1 z=1 2
2Mi yi of the inequality variable.
Mi Mi
(1 − vlz )|yl − yz |
+ l=1 z=1 2 The empirical model
2Mi yi
Assuming parameter homogeneity (li = l for all i), the
= NGi + NNGi (19) empirical counterpart of the model given in equation
(16) can be expressed, at a given time, for region i, as
where, for each NUTS-2 region i, the first term on the
follows:
right-hand side represents the neighbour component
(NGi ), and the second one represents the non-neighbour gi = b0 + b1 lnyi0 + b2 lnIneqi0 + b3 lnsiH
component (NNGi ). This decomposition reveals that the
Gini index nests a measure of spatial autocorrelation. As 
N 
N
+ b4 ln (d + g + ni ) + r wij gj + r1 wij lny j0
the spatial autocorrelation increases, the NNGi component j=1 j=1
should grow relatively to the NGi component, since values
similarity in space would be in effect. The result is the 
N 
N
+ r2 wij lnIneqi + r3 wij lnsiH
opposite in the presence of negative spatial autocorrela-
j=1 j=1
tion, since the difference between the variate values
observed for non-neighbour pairs would be smaller than 
N

that between neighbour pairs. In either case, the degree + r4 wij ln (d + g + nj ) + 1i

j=1
of spatial autocorrelation can be assessed by comparing
the relative contribution of these two components (Rey (21)

REGIONAL STUDIES
692 Domenica Panzera and Paolo Postiglione

where: of spatial dependence and spatial heterogeneity have

  been proposed in the recent literature (Basile & Gress,
1 yit
gi = ln 2005; McMillen, 2012). A penalized-spline SDM has
T yi0 been introduced by Basile et al. (2014). This model rep-
with T denotes the number of time periods under investi- resents an important tool to identify the functional form
gation; yit and yi0 express the GDP values per worker at of the relationship between the response variable and its
the final and initial periods, respectively; and the inequality predictors, and even in the presence of structured model
variable is expressed as: can be useful to distinguish between substantive spatial
  dependence (i.e., spatial spillovers) and spatial dependence
m generated by omitted variables.
lnIneqi0 = ln p2i0 i0 NGi0 ,
m0 The substantive spatial dependence occurs when the
variable of interest at one location is influenced by its
where the subscript indicates, for all the quantities, that
values at other locations and is captured by spatial weight
they refer to the initial time period. Considering the initial
matrices commonly specified according to physical, econ-
level of inequality is in line with the specification proposed
omic or social distances. Conversely, the spatial depen-
by De Dominicis (2014), and also appears consistent with
dence generated from a number of latent factors is
the assumption about the relation between initial inequal-
interpreted as a residual dependence that affects the
ity and investments on which the theoretical model is
error term (Anselin & Rey, 1991).
based (Galor, 2000; Kaldor, 1956; Koo & Song, 2016).
Common factor structures, that consider interaction
The parameter b0 is a constant:
effects among the error terms, are increasingly used in
1i  N (0, s2 ), recent models developed to deal with cross-sectional
dependence in a panel data setting (Bailey et al., 2016;
as are the error terms: Pesaran, 2015). In a cross-sectional setting, the discrimi-
1 − e−lT nation between substantive and residual spatial depen-
b1 = − dence has been mainly based on tests on parameter
T
restriction, such as the common factor test (Anselin,
1 − e−lT aC + fC 1988). According to the common factor hypothesis an
b2 = −
T 1−h SDM specification can be simplified by a spatial error
model, which includes the spatial interactions among the
1 − e−lT aH + fH error terms. This hypothesis is thus formulated by impos-
b3 = − , b4
T 1−h ing a parameter restriction on the SDM specification.1
1 − e−lT h A further issue related to spatial data pertains to the sim-
=− , r1 ultaneous treatment of spatial dependence and spatial het-
T 1−h
erogeneity. The identification of spatial regimes could be a
1 − e−lT (1 − aC − aH ) suitable alternative to account for the heterogeneity in the
= g
T 1−h model parameters (Durlauf & Johnson, 1995; Quah,
1997). Clusters of regions that share similar structural
1 − e−lT aC 1 − e−lT aH
r2 = g, r3 = g, characteristics and growth paths could be identified by
T 1−h T 1−h some a priori criteria, like the initial level of GDP per capita
1 − e−lT aC+ aH or the belonging to some geographical zones, or using
r4 = g endogenous methods (Durlauf & Johnson, 1995; Posti-
T 1−h
glione et al., 2010, 2013). The application of exogenous cri-
and teria for the identification of clusters of EU regions has been
g(1 − aC − aH ) advised by Ertur et al. (2006) and a classification of European
r= . regions based on their level of development has been recently
1−h
proposed by Iammarino et al. (2019). The classification of
The specification in (21) is known in literature as the regions according to their level of development is relevant
spatial Durbin model (SDM) (LeSage & Pace, 2009). in a policy perspective, being the basis for determining the
The SDM introduces a spatial lag on the dependent vari- regional eligibility for structural and investment funds. Our
able as well as on all the explanatory variables. exogenous identification of spatial regimes is based on the
The linear specification in (21) is supported by the 2007–13 funding period, in which EU regional policy con-
theoretical model proposed and developed in the previous sisted of three objectives, such as convergence, regional com-
section. When the empirical specifications are not sup- petitiveness, and employment and European territorial
ported by the theory, the unknown functional form rep- cooperation. The regions covered by the convergence objec-
resents a potential source of misspecification. This issue tive correspond to the less developed regions, with per capita
could be addressed by adopting a semiparametric frame- GDP less than 75% of the EU average. In the proposed
work, which is generally more flexible with respect to para- empirical application, we focus on the latter classification
metrical models. Semiparametric specifications that to identify clusters of regional units that potentially differ
combine non-linearity with the simultaneous treatment in their growth paths.

REGIONAL STUDIES
 The impact of regional inequality on economic growth: a spatial econometric approach
The identification of clusters of regions based on the
convergence objective allows to control for specific charac-
teristics that the regions with similar development patterns
share.
Furthermore, different regional growth conditions are
introduced in our empirical model, by including dummy
variables that facilitate considering the presence of capi-
tal cities in the regions as well as the cross-border
effects. The presence of the capital city in the region
could represent a growth promoting factor since these
cities usually concentrate a number of relevant economic
and social activities, being the administrative and econ-
omic centre of the country (Butkus et al., 2018). Con-
versely, being located on borders could represent a
barrier to regional economic growth. Border regions rep-
resent a peculiar regional typology (Eurostat, 2019).
They could be classified into two main categories such
as internal border regions and external border regions.
While internal border regions identify regional units
that are located on borders between EU member states
and/or European Free Trade Association (EFTA)
countries, the external border regions correspond to
those regions that are located on borders between EU
member states and non-member countries (or countries
outside the EFTA). The border typology is usually
identified relying on land borders (Eurostat, 2019), but
different definitions, including both land and maritime
borders, are possible (Capello et al., 2018). Our analysis
is focused on the land border typology, and both the
internal and the external border regions are defined at
the NUTS-2 level (see the empirical application). Border
regions are typically characterized by a geographically
peripheral location, that is far from the power and
administrative centre of the country, and close to regions
belonging to other countries. These areas could suffer
from the border effect, that consists in limited cross-
country economic interactions due to differences in cul-
ture, regulations, and business norms and higher trans-
action costs between countries (Capello et al., 2018).
A number of empirical analyses focused on European
countries revealed the presence of border effects also
for regions that are located on EU internal borders,
despite the market integration (see, among others,
Kashiha et al., 2016). The impact of international bor-
ders has been mostly analysed with reference to trade
relations, and measured in term of lost trade (Anderson
& van Wincoop, 2003; McCallum, 1995). Recent con-
tributions focused on the relation between spatial
inequality within countries and trade have been proposed
by Rodríguez-Pose (2012), and Ezcurra and Rodríguez-
Pose (2013, 2014). Border effects have been linked to
economic growth in Capello et al. (2018) that developed
a model including a dummy variable to identify border
regions. The authors found that the growth perform-
ances in internal border regions do not significantly dif-
fer from those of non-border regions, even if the former
appear to be unable to exploit their resources as effi-
ciently as the other EU regions. These results could be
explained through the positive effects produced by the
693
cross-border cooperation programmes supported by the
European Commission.
The empirical model (21) is augmented with the afore-
mentioned dummy variables, yielding to the following
specification:
gi = b0 + b1 lnyi0 + b2 lnIneqi0 + b3 lnsiH
+ b4 ln (d + g + ni ) + b5 CCi + b6 IBi + b7 EBi

N 
N 
N
+r wij gj + r1 wij lny j0 + r2 wij lnIneqi
j=1 j=1 j=1

N 
N
+ r3 wij lnsiH + r4 wij ln (d + g + nj ) + 1i
j=1 j=1
(22)
where CCi denotes the capital city dummy variable, such
that CCi = 1 if the capital city is located in the region i
and CCi = 0 otherwise; IBi is the internal border
dummy variable, such that IBi = 1 if unit i is an internal
border region and IBi = 0 otherwise; and EBi represents
the external border dummy variable, with EBi = 1 if
unit i is an external border region and IBi = 0 otherwise.
Equation (22) represents our empirical model that will
be estimated in our illustration.
Possible bidirectional causal effects between inequality
and regional growth are not investigated in our analysis,
which has the main objective of investigating the role of
regional disparities in driving economic growth. For a
recent contribution on assessing the impact of regional
income levels on inequality using spatial econometrics
tools, see Artelaris and Petrakos (2016). In our proposal,
the link between regional growth and within-region
inequality is derived by the developed theoretical model,
which is empirically tested in the following section.
EMPIRICAL ANALYSIS
To test the model (22), we focus on data related to 245 EU
NUTS-2 regions from 22 EU countries.2 The source of the
data is Eurostat’s general and regional statistics database;
the period under investigation ranges from 2003 to 2016.
In model (22), the dependent variable, gi , expresses the
natural logarithm of the average growth rate of GDP per
worker. The inequality variable, lnIneqi0 , is represented by
the natural logarithm of the neighbour component of
Gwithin (that is considered as the part of inequality not deter-
mined by spatial dependence). For each of 245 NUTS-2
region, Gwithin of the Gini index is calculated using GDP
values per worker related to 1255 NUTS-3 regions3 belong-
ing to the aforementioned NUTS-2 units and it is decom-
posed into its neighbour and non-neighbour components
according to equation (20). The resulting inequality variable
is referred to the initial time period (i.e., 2003).
The human capital variable, lnsiH , is measured as the
natural logarithm of the percentage of population aged
from 25 to 64 years who attained tertiary education (levels
5–8 of the International Standard Classification of Edu-
cation (ISCED) 2011 classification). This percentage is
REGIONAL STUDIES
694 Domenica Panzera and Paolo Postiglione

considered with reference to 2005, which is the early

Coefficient of variation
period for which data on this variable are available for
the considered regions.
Note that considering the explanatory variables at the

0.2079
0.3543
0.6922
0.3652
0.1487
beginning of the period under investigation, or as close
as possible to it, helps to mitigate problems connected to
endogeneity (Crespo Cuaresma et al., 2014).
The variable ni is measured by the natural logarithm of
the average (over the period 2003–16) growth rate of the
working population. The term (d + g) is supposed to be
equal to 0.05, following a common assumption in the lit-
erature (Mankiw et al., 1992).

Maximum

148,112
0.1948

0.6794

0.0766
0.4550
The proximity relationships among regional units are
summarized by the spatial weight matrix that, in our empiri-
cal analysis is constructed according to the k-nearest neigh-
bours, with k = 7 Gwithin . The k-nearest neighbour criterion
is built considering the Euclidean distance between the cen-
troid of each spatial unit i and the centroids of all other units

0.0975
56,123
0.1829

0.0597
0.2720
j = i, for i, j = 1, 2, .., N . The k closest units to i define

Q3
the set of its neighbours. The choice of k = 7 allows to
avoid the presence of non-connected regions. In fact, as
highlighted by Le Gallo and Ertur (2003), EU regions
have on average five to six contiguous neighbours. Different

0.0951
49,029
0.1307

0.0550
0.2214
Mean
values of k, as k = 5 and k = 9, have been considered in the
definition of the proximity matrix. However, these different
specifications of the proximity matrix did not give rise to
significant differences in the results.4
The main summary statistics of the dependent and
Median
0.0898
50,634
0.1157

0.0558
0.2190
independent variables are reported in Table 1. All variables
are not expressed in natural logarithm terms, and the
values of the inequality variable are not weighted by the
population shares.
As additional variables in our model we consider dummy
0.0850
41,036
0.0616

0.0512
0.1590

variables that indicate whether the region includes the

Q1

national capital city, and if it is an internal or external border

region. In our analysis, border regions are identified at the
NUTS-2 level. Around the 48% of the regions under con-
sideration are internal border areas (i.e., 117 regions), while
Minimum

around the 10% of these regions (i.e., 24 regions) are located

0.0687

0.0080

0.0258
0.0750
9915

on external borders. A map of border regions is presented in

Note: GDP, gross domestic product; PPS, purchasing power standards.

Figure 1. Dark grey indicates the border regions.

The variables under consideration are modelled through
the SDM specification that is supported by the developed
theoretical model. As a robustness check, this specification
2003–16

2003–16

is compared with the spatial lag and the spatial error speci-
Period

2003
2003
2005

fications. To this end, we use the Lagrange multiplier (LM)

Table 1. Summary statistics by variable.

tests, in their classic and robust versions, which are based on

the residuals of the ordinary least squares (OLS) model
(Elhorst, 2010). According to the approach introduced by
Elhorst (2010), when, based on the LM tests, the spatial
Inequality (Ineqi0 = i0 NGi0 )
GDP per worker (yi0 ) in PPS

lag, the spatial error model or both these specifications are

Average growth rate of yi0

preferable to the OLS model, the SDM specification

m0
m

should be estimated. Moreover, when these spatial models

Human capital (sHi )

are estimated by maximum likelihood (ML), likelihood

ratio (LR) tests can subsequently be used to verify two
different hypotheses. The first hypothesis concerns whether
Variables

ni + 0.05

the SDM can be simplified by a spatial lag model; the

second hypothesis concerns whether the SDM could be
simplified by a spatial error specification. The latter

REGIONAL STUDIES
 The impact of regional inequality on economic growth: a spatial econometric approach 695

Figure 1. Internal border (a) and external border (b) European Union NUTS-2 regions.
Note: Dark grey indicates the border regions.

hypothesis corresponds to the common factor hypothesis.
Results for LM and LR tests are reported in Table 2.
Results for the classic LM tests indicate that the OLS
model should be rejected in favour of both the spatial spe-
cifications, and, similarly, both the robust LM tests are
highly significant. These results indicate that the SDM
specification should be estimated. Results for the LRerr
test show that the common factor hypothesis is rejected
and, similarly, the LRlag test is significant. These results
confirm the appropriateness of the SDM specification.
The ML estimates for the SDM specification are
reported in Table 3. The standard OLS estimates of the
model are also presented, together with some diagnostics
and performance measures. As shown, the coefficients
associated with the initial level of GDP per worker, the
capital city and the internal border dummy variables are
significant in the non-spatial model. Furthermore, the
signs of the coefficients are as expected for all explanatory
variables, with the only exception of the working popu-
lation growth rate. The coefficient associated with the

REGIONAL STUDIES
696 Domenica Panzera and Paolo Postiglione

Table 2. Lagrange multiplier (LM) tests on spatial Table 3. Estimates for ordinary least squares (OLS) and the
dependence and spatial error autocorrelation, likelihood spatial Durbin model (SDM).
ratio (LR) tests on parameter restrictions. Variable OLS SDM
LMerror 72.9600*** Constant 0.2750*** 0.1600***
LMlag 86.5100*** (0.0225) (0.0329)
Robust LMerror 7.9290*** GDP per worker (lnyi0 ) −0.0236*** −0.0130***
Robust LMlag 21.4700*** (0.0017) (0.0023)
LRerr 20.4000*** Inequality (lnIneqi0 ) 0.0004 0.0001
LRlag 22.2100*** (0.0004) (0.0003)
Note: Significance: ***1%, **5% and *10%.
Human capital (lnsHi ) 0.0005 0.0043**
(0.0015) (0.0020)
capital city dummy variable expresses the differences in
ln(ni + 0.05) 0.0001 −0.0156***
growth between the regions where the national capital
cities are located and the other regions, given the other (0.0034) (0.0037)
characteristics. The coefficient estimate is positive and CCi 0.0134*** 0.0102***
statistically significant indicating the presence of a slight (0.0018) (0.0016)
difference in the growth rate of GDP per worker between IBi 0.0044*** 0.0020**
the regions where the capital cities are located and other (0.0010) (0.0009)
regions, with the first ones overperforming with respect EBi −0.0013 −0.0029*
to the second ones. Similar considerations apply to the (0.0021) (0.0017)
coefficient associated with the internal border dummy
lag GDP per worker 0.0002
variable that indicates a growth rate of GDP per worker
slightly higher in the internal border areas than in the (0.0033)
other regional units. The coefficient associated with the lag Inequality 0.0003
external border dummy is negative, but it is not statistically (0.0010)
significant. The goodness of fit of the model measured in lag Human capital −0.0062**
term of R2 is around 0.60, and the Moran’s I test is highly (0.0025)
significant, giving evidence of the presence of spatial Lag ln(ni + 0.05) 0.0206***
dependence. (0.0053)
Moving to the SDM specification, all coefficients
r 0.5635***
associated with the independent variables have the expected
sign, with the only exception of the coefficient associated (0.0690)
with the spatial lag of the inequality variable. The coeffi- l (convergence rate) 2.8648% 1.4349%
cient associated with this variable is not statistically signifi- Moran’s I 0.2759***
cant as well as the coefficient associated with the inequality Jarque–Bera test 69.9300***
variable and the spatial lag of the initial level of GDP per (normality)
worker. The coefficients associated with the dummy vari- Breusch–Pagan test 85.5900***
ables in the model are all significant. The positive sign of (heterogeneity)
the coefficients associated with the capital city and the
Studentized Breusch– 41.1500***
internal border dummy variables reveal that both these cat-
egories of regions overperform the other regions in the Pagan test
GDP per worker growth rate. The negative sign of the coef- (heterogeneity)
ficient associated with the external border dummy variable Number of 245 245
shows that being located on the external border negatively observations
impacts on the regional growth performances. R2 0.6070
A lower value of the Akaike information criterion Akaike information −1678.36 −1764.10
(AIC) indicates an improvement in the goodness of fit criterion (AIC)
of the spatial specification with respect to the non-spatial
Notes: GDP, gross domestic product.
one. Both the specifications indicate that a convergence Standard errors are shown in parentheses. Significance: ***1%, **5% and
process is taking place among the considered regions, *10%.
but the inclusion of spatial effects tends to reduce the esti-
mated speed of convergence. the same location and could indirectly affect the dependent
As pointed out by LeSage and Pace (2009), in order to variable at different locations. The average direct impact
correctly interpret the SDM coefficients, the computation provides a summary measure of the impact arising from
of direct, indirect and total impacts is needed. In fact, changes in the i-th observation of a covariate on the depen-
because of the spatial dependence effect that is incorporated dent variable of the i-th region, and also includes feedback
in the model, a change in an explanatory variable for a single influences. The average indirect impact reflects spatial spil-
spatial unit has a direct impact on the dependent variable at lovers. The sum of the average direct and indirect impacts

REGIONAL STUDIES
 The impact of regional inequality on economic growth: a spatial econometric approach
Table 4. Average impacts for the spatial Durbin model (SDM).
Average Average Average
direct indirect total
Variable impact impact impact
GDP per −0.0138*** −0.0155*** −0.0293***
worker (lnyi0 )
Inequality 0.0001 0.0008 0.0009
(lnIneqi0 )
Human 0.0039** −0.0082** −0.0043
capital (lnsHi )
ln(ni + 0.05) −0.0144*** 0.0259** 0.0115
Notes: GDP, gross domestic product.
Significance: ***1%, **5% and *10%.
measures the average total impact. Table 4 reports the aver-
age direct, indirect, and total impacts that would arise from
changing each explanatory variable in the SDM specifica-
tion. A set of 2000 Monte Carlo (MC) draws is used to pro-
duce the impact estimates along with inferences regarding
their statistical significance.
A comparison between the average direct impacts in
Table 4 and the parameter estimates in Table 3 reveals
that these estimates have the same signs and are similar in
magnitude. The slight differences between the two sets of
estimates are due to feedback effects (Fischer, 2011).
The average indirect impact estimates for the human
capital and the population growth rate are significant
and have the expected signs. The average indirect impact
associated with the initial level of GDP per worker is
negative and significant, while the average indirect impact
estimate for the inequality variable is positive but not sig-
nificant. The average total impact estimates are significant
only for the initial level of GDP per worker.
To account for spatial heterogeneity, we estimate the
SDM model for two different clusters of regions corre-
sponding to regions that are covered by the convergence
objective and regions that are not covered by the conver-
gence objective. A spatial map of these two clusters is
shown in Figure 2. Dark grey indicates regions that are
covered by the convergence objective. Light grey is used
for non-convergence regions.
Estimation results for the identified spatial clusters are
reported in Table 5. As shown, some differences in the
parameter estimates emerge between the two clusters of
regions. The coefficient associated with the initial level
of GDP per worker is negative and significant for both
clusters, indicating that a convergence process is taking
place in both these groups of regions. However, the
speed of convergence for less developed regions is higher
with respect to that reported for the more developed
regions. This result indicates that economic growth pro-
ceeds faster in less developed regions than in other regions,
and this circumstance could be partly attributed to the
presence of EU funding in support of these regions. The
coefficient associated with the inequality variable is posi-
tive and significant only for the cluster of less developed
regions. This result indicates that, for this group of
697
regions, inequality positively impacts on the process of
economic growth. This result is consistent with the
empirical findings in De Dominicis (2014). As a further
result, we obtain that the human capital positively impacts
on growth, but this effect is only significant for more
developed regions. The coefficient associated with the
population growth rate is negative and significant for
both clusters of regions. The coefficients associated with
the dummy variables reveal that the presence of the
national capital city has a significant positive impact on
regional growth for both more developed and less devel-
oped regions. Being located on the internal borders
appears to influence regional growth positively, but this
effect is significant only for more developed regions. Con-
versely, being located on the external border appears as
detrimental for growth, but this negative impact is only
significant for less developed regions. All coefficients
associated with the spatially lagged explanatory variables
have the expected sign in the cluster of regions not covered
by the convergence objective. However, the coefficients
associated with the spatial lag of the initial level of GDP
per worker and with the spatial lag of the inequality vari-
able are not significant. For less developed regions, the
coefficient associated with the spatially lagged inequality
variable is positive and statistically significant, revealing
that the inequality observed in neighbour regions posi-
tively impact on growth in a particular region. As further
results, we can note that the spatial autocorrelation par-
ameter is positive and highly significant, and the AIC
reveals that the goodness of fit of the model is improved
in the heterogeneous model, with respect to the homo-
geneous one. These results point out the importance of
accounting for both the heterogeneity and the spatial
dependence of observations.
In order to evaluate the significance of the identified
spatial clusters, we can use the Chow test (Chow, 1960).
The null hypothesis of the test is that the vector of par-
ameters is constant. This test is implemented for all
model parameters jointly (overall stability test) as well as
for each parameter separately (individual stability test).
Results for the overall stability test reveal that the spatial
Chow test is highly significant, giving support to the
idea of considering spatial regimes to control for spatial
heterogeneity. Concerning the individual stability tests,
we can observe that tests on the equality of the coefficients
associated with the initial level of GDP per worker, with
the inequality variable and with the capital city dummy
variable are significant. This evidence shows that the
spatial heterogeneity present in the considered regions is
mainly due to the joint effect of these variables.
For the correct interpretation of the SDM coefficients
we refer to direct, indirect and total impacts that, for both
the identified spatial clusters, are reported in Table 6. For
both groups of regions, the average direct impacts have the
same sign as the parameter estimates (Table 5). The results
reveal that the human capital is a growth promoting factor
in more developed regions, while does not have a signifi-
cant direct effect in less developed regions. Conversely,
inequality positively impacts on growth in less developed
REGIONAL STUDIES
698 Domenica Panzera and Paolo Postiglione
Figure 2. Convergence objective regions (dark grey) and non-convergence objective regions (light grey) identified according to
the European Union’s Cohesion Policy (2007–13).
regions, while does not have a significant direct effect on
growth in more developed areas. For more developed
regions, the average indirect effects reveal significant
spatial spillovers for the human capital variable (positive
indirect effect) and for the population growth rate (nega-
tive indirect effect). In regions covered by the convergence
objective, significant spatial spillover effects are associated
with the initial level of GDP per worker (negative indirect
effect), the inequality variable (positive indirect effect),
and the population growth rate (negative indirect effect).
These empirical results suggest that that differences in
the level of development of regions could determine differ-
ences in the factors driving regional growth. In fact, the
positive impact of inequality on regional growth that is
assumed in our theoretical model is only verified for less
developed regions. Modelling spatial heterogeneity in
the proposed model allows to appreciate the differences
between the convergence-objective and the non-conver-
gence objective regions, and to confirm the assumed
relationship between inequality and regional growth rela-
tively to the first group.
REGIONAL STUDIES
The positive relationship between inequality and growth
is significant at the earlier stages of development because of
the main role played by physical capital accumulation on
regional growth (Galor & Moav, 2004). Hence, the mech-
anism according to higher inequality stimulates higher sav-
ing and physical capital accumulation, and thus growth, is
verified for less developed regions. Conversely, in more
developed economies, the human capital accumulation
appears to replace physical capital accumulation as a growth
promoting factor (Galor & Moav, 2004). Our empirical
results support this evidence, revealing a significant and
positive effect of human capital on growth only for tran-
sition and more developed regions.
Our empirical results partly confirm empirical findings
in the previous literature. Like in De Dominicis (2014) our
empirical evidence shows the growth promoting effect of a
relatively concentrated distribution of GDP at lower level
of development. Unlike De Dominicis (2014), we found a
positive and significant spillover effect associated with the
inequality variable for less developed regions. This implies
that, at lower levels of development, the initial internal
 The impact of regional inequality on economic growth: a spatial econometric approach 699

Table 5. Parameter estimates for spatial regimes, convergence objective versus non-convergence objective regions.
Variable SDM: non-convergence objective SDM: convergence objective
Constant 0.0753 0.3625***
(0.0499) (0.0562)
GDP per worker (lnyi0 ) −0.0054* −0.0246***
(0.0030) (0.0038)
Inequality (lnIneqi0 ) −0.0003 0.0017**
(0.0003) (0.0007)
Human capital (lnsHi ) 0.0077*** 0.0017
(0.0025) (0.0027)
ln(ni + 0.05) −0.0193*** −0.0145***
(0.0056) (0.0044)
CCi 0.0058*** 0.0192***
(0.0020) (0.0025)
IBi 0.0024** 0.0002
(0.0010) (0.0015)
EBi −0.0049 −0.0049**
(0.0031) (0.0021)
lag GDP per worker 0.0011 −0.0052
(0.0043) (0.0049)
lag inequality −0.0008 0.0050**
(0.0011) (0.0024)
lag human capital −0.0075*** −0.0098**
(0.0029) (0.0046)
Lag ln(ni + 0.05) 0.0299*** 0.0058
(0.0080) (0.0069)
Overall r 0.2977***
(0.0874)
l (convergence rate) 0.5615% 3.0157%
Number of observations 175 70
Akaike information criterion (AIC) −1803.20
Chow test (overall stability) 4.5548***
Individual stability test for constant 12.1123**
Individual stability test GDP per worker 14.2903***
Individual stability test inequality 5.4865**
Individual stability test human capital 2.5201
Individual stability test ln(ni + 0.05) 0.5097
Individual stability test CCi 17.6879***
Individual stability test IBi 1.0215
Individual stability test EBi −0.0009
Notes: GDP, gross domestic product; SDM, spatial Durbin model.
Standard errors are shown in parentheses. Significance: ***1%, **5% and *10%.

disparities in neighbour regions have a positive impact on
economic growth in a particular region. Our results con-
firm the empirical evidence in De Dominicis (2014)
about the role of inequality in more developed regions.
In fact, like in the De Dominicis (2014), our empirical
results indicate, for this group of regions, not significant
impacts of inequality on regional growth. This suggests
that initial regional disparities in more advanced regional
economies do not exert a role in enhancing regional
growth. However, our analysis provides new evidence for
less developed regions, by isolating the actual inequality
(i.e., the component of inequality that is not influenced
by spatial dependence) from the component of inequality
that is influenced by regional interdependencies driven
by geographical proximity.
The different impacts of inequality on growth for
different groups of regions suggest the existence of several
factors underlying the distinctive growth experiences. In
fact, the differences in the economic convergence process
experienced by regions result from their different levels

REGIONAL STUDIES
700 Domenica Panzera and Paolo Postiglione
Table 6. Average impacts for spatial regimes, convergence objective versus non-convergence objective regions.
SDM: non-convergence objective
Average
Average direct indirect
Variable impact impact
GDP per worker −0.0055* −0.0022
(lnyi0 )
Inequality −0.0003 −0.0001
(lnIneqi0 )
Human capital 0.0078*** 0.0032*
(lnsHi )
ln(ni + 0.05) −0.0195*** −0.0079*
Notes: GDP, gross domestic product; SDM, spatial Durbin model.
Significance: ***1%, **5% and *10%.
of development and from the interactions among policy
and institutional aspects, as well as among historical and
geographical factors characterizing the regional units.
Raising the awareness about these differences among
regions could be useful in promoting place-based policies,
which focus on the peculiarities and the specific needs of
territories.
CONCLUSIONS
In this paper we developed a theoretical model that relates
inequality and regional growth, explicitly taking into
account the spatial interactions among regions. The pro-
posed model extends the spatial MRW model developed
by Fischer (2011), introducing inequality among the
explanatory variables. The physical capital investment
rate is expressed as a function of inequality, based on the
assumption that higher inequality enhances investments
from richer regions, while the redistribution of resources
from rich to poor regions, determines a decreasing of sav-
ings and investments (De Dominicis, 2014).
The proposed specification includes the spatial lag of
the exogenous variables as well as the spatial lag of the
endogenous variable and is referred to as the spatial Dur-
bin model (LeSage & Pace, 2009). The inequality variable
included in the model specification is derived by the spatial
decomposition of the Gini index proposed by Rey and
Smith (2013).
Our theoretical model states that the growth rate of
output in a regional economy depends positively on
inequality in the region and negatively on inequality in
neighbouring regions. By taking into account the spatial
interactions among regions, the predictions of our model
allow a better understanding of the role played by geo-
graphical location and spatial externalities in regional
growth and in its link with income inequality.
The proposed model is tested focusing on 245 NUTS-2
regions across 22 European countries, over the period
2003–16. Results from test on parameter restrictions con-
firm the appropriateness of the proposed specification,
and the empirical estimates mainly support the theoretical
model. The coefficient associated with the inequality
REGIONAL STUDIES
SDM: convergence objective
Average
Average total Average direct indirect Average total
impact impact impact impact
−0.0077* −0.0249*** −0.0101** −0.0350***
−0.0004 0.0017** 0.0007* 0.0024**
0.0110*** 0.0017 0.0007 0.0024
−0.0274*** −0.0147*** −0.0060* −0.0207***
variable is not significant when considering the homo-
geneous model. Assuming two different spatial regimes,
identified according to the eligibility of regions for EU
funds under the convergence objective, reveals differences
in the growth process as well as in the growth promoting
factors. Specifically, we found that in less developed regions
the converge process is taking place at a faster rate than that
obtained for the more developed regions. This result could
be explained by the EU policy that support convergence in
poorer areas, but also by the combination of different factors
that exert a growth promoting effect. Specifically, the initial
internal disparities appear to enhance growth in less devel-
oped regions, while do not play a significant role in wealthy
regional economies. In this latter group of regions, the
investment in human capital has a positive impact on
growth, while it does not have a significant effect on growth
at lower level of development. These differences emerge
only when spatial similarity is considered jointly with
regional peculiarities, and confirm the relevance of place-
based policies, differentiated according to the specific
needs of regional economies. The identification of two sep-
arate clusters, corresponding to different levels of regional
development, facilitate a deeper understanding of the
impact of inequality on growth in different regional econ-
omies. A further step, in the future research, might consist
in introducing these differences in the definition of the
proximity relationships. This would imply assigning differ-
ent spatial weights to neighbour regions according to their
level of development.
To proper extract the influence of neighbour regions,
such proximity matrices could be also defined differentiat-
ing among the neighbour units that belong to the same or
a different country with respect to the region under con-
sideration. Defining proximity structures based on these
criteria would allow to summarize in a single matrix
specific effects that in our model are introduced by using
dummy variables and spatial clustering.
DISCLOSURE STATEMENT
No potential conflict of interest was reported by the
author(s).
 The impact of regional inequality on economic growth: a spatial econometric approach
FUNDING
This study was financed by the project H2020 IMAJINE,
which received funding from the European Union’s Hor-
izon 2020 Research and Innovation Programme [grant
agreement number 726950]. This paper reflects only the
authors’ view. The European Commission is not respon-
sible for any use that may be made of the information
the paper contains.
NOTES
1. Given the SDM specification Y = rWY + X b
+WX u + 1 , with r, b and u denoting the parameters
associated with the spatially lagged endogenous explana-
tory variable, with the exogenous explanatory variable
and with the spatially lagged exogenous explanatory
variables, respectively, the spatial error specification is
derived by imposing the following parameter restriction:
u = −rb.
2. The NUTS-2 regions that, because of missing data,
are excluded by the analysis are the five regions belonging
to Denmark, two regions of Germany: Chemnitz and
Leipzig; two regions of Spain: Ciudad Autonoma de
Ceuta and Ciudad Autonoma de Melilla; the five overseas
Departments in France; Cyprus; the two regions of Slove-
nia; the two regions of Croatia; the seven regions of
Hungary; and the one region of the UK: Highlands and
Islands. The region of London is partitioned into Inner
London and Outer London, according to the 2010
NUTS classification. For the identification of all other
NUTS-2 regions, we refer to the 2013 NUTS classifi-
cation. Luxembourg is excluded from the analysis because
of the coincidence between the NUTS-2 and NUTS-3
levels of classification, which does not allow the calculation
of the within-component of inequality.
3. Among the EU NUTS-2 regions there are some
regions composed by a relatively large number of
NUTS-3 regions, and other regions composed by only
one NUTS-3 region. For the latter regions, the Gini
index assumes a value of 0. In order to include also these
regions in our analysis, we follow the same approach pro-
posed by De Dominicis (2014), and when a NUTS-2
region is composed by only one NUTS-3 region, we assign
to the region a value of the Gini index equal to the average
of the Gini index computed for the NUTS-2 regions in
the same country.
4. Estimation results obtained for these different specifi-
cations of the proximity matrix are available from the
authors upon request.
ORCID
Domenica Panzera http://orcid.org/0000-0002-0699-
6983
Paolo Postiglione http://orcid.org/0000-0002-2798-
4519
701
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