European regional efficiency and geographical externalities

What is it about?

This paper analyses region-level technical efficiency in nine European countries over the 1995–2007 period. We propose the application of a nonparametric conditional frontier approach to account for the presence of heterogeneous conditions in the form of geographical externalities. Such environmental factors are beyond the control of regional authorities, but may affect the production function. Therefore, they need to be considered in the frontier estimation. Specifically, a spatial autoregressive term is included as an external conditioning factor in a robust order-m model. Thus we can test the hypothesis of non-separability (the external factor impacts both the input– output space and the distribution of efficiencies), demonstrating the existence of significant global interregional spillovers into the production process.

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Photo by Markus Spiske on Unsplash

Photo by Markus Spiske on Unsplash