European Regional Efficiency and Geographical Externalities : A Spatial Nonparametric Frontier Analysis

This paper analyses region-level technical efficiency in the European Union over the 1995 to 2007 period. We propose the application of a nonparametric conditional frontier methodology to account for the presence of geographical externalities that are beyond the control of regional authorities. Specifically, a spatial autoregressive term is included as an external conditioning factor permitting to test the hypothesis of global separability and demonstrate that there are interregional spillovers into the production process.Our findings show that geographical externalities affect both the frontier level and the probability of being more or less efficient. Specifically, the results support the fact that the spatial autoregressive term has an inverted U-shaped non-linear impact on the performance of regions. This finding can be interpreted as a differential effect of interregional spillovers depending on the economic size of the neighbors: positive externalities for small values, possibly related to agglomeration economies, and negative externalities for high values, indicating the possibility of production congestion. We also find that there is a strong geographic pattern of European regional efficiency, and that the levels of technical efficiency have converged during the period under analysis