Economic convergence of regions: Do interpersonal transfers matter?

Large disparities exist among European regions. Not only do they exist across national borders, but also within many states. Countries redistribute a substantial amount of wealth through taxation and social security systems in order to promote equity among individuals. Economic theory can help explain different levels of economic development as well as convergence and divergence dynamics among economies. Economic theory also suggests that taxes and redistribution of income are generally distorting economic activity. This paper empirically investigates convergence among European regions and the impact of inter-personal transfers on regional growth. Standard convergence regressions are done in a cross section as well as in a panel data setting. Results suggest that convergence is taking place among the 229 European regions in the dataset. Convergence within countries happens much slower, which indicates that the observed convergence is due to a convergence across countries. In order to estimate the impact of transfers, a transfer index allowing for a separate analysis of contributing and receiving regions is computed. Once controlling for regional fixed heterogeneity, no significant effect of transfers on income growth is found, neither on the contributing nor on the benefiting regions.