Knowledge Spillovers in Neoclassical Growth Model: an extension with Public Sector

We propose a framework to analyze convergence between regions, incorporating the public sector and technological knowledge spillovers in the context of a Neoclassical Growth Model. Secondly, we apply novel estimation methods pertaining to the spatial econometrics literature introducing a spatial autoregressive panel data model based on instrumental variables estimation. Additionally, we introduce marginal effects associated with changing explanatory variables. Our model makes it possible to analyze, in terms of convergence, the results obtained in Spanish regions with the policies implemented during the period 1980-2007. The results support the idea that investments in physical, private and public capital, as well as in education have a positive effect on regional development and cohesion. Therefore, we can conclude that it is possible to obtain better results for regional convergence with higher rates of public investment. We also obtain interesting results that confirm the existence of spillover effects in economic growth and public policies, identifying their magnitude and significance.