Market Potential, Spatial Dependences and Spillovers in European Regions

[Abstract] This paper reinterprets the New Economic Geography (NEG) ‘wage’ equation by dis-tinguishing two different types of spatial dependences: global spatial trend and local spa-tial autocorrelation. A measure of Market Potential in this equation is able to 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 neighbors. Using cross-sectional European regional data, the paper compares different weighting schemes to build spatial lags. The estimation of spatial models of a NEG equa-tion for GVA per capita reveals new research challenges.