Specialization and risk sharing: evidence from European regions

Economic theory emphasizes that risk sharing makes it possible to exploit benefits from comparative advantages and economies of scale. Unlike previous studies we reject the assumption of parameter homogeneity across geographical units in measuring risk sharing. The estimated regional-specific index of risk sharing is then used as a covariate in a model of industrial specialization for the EU15 regions. By estimating a number of nonparametric additive spatial autocovariance models, allowing for nonlinearities and spatial dependence, we show that industrial specialization is positively affected by risk sharing measures even controlling for other relevant regressors.