An Analysis on the neighborhood Effect for Regional Economy in Korea

The objective of this paper is to analyze the neighborhood effect of the regional economy in Korea. It is necessary for the central governments to examine the neighborhood effect for the public expenditures of local governments in order to find out the optimal size local governments.

We constructed the spatial econometric model in order to analyze the neighborhood effect of regional economy in Korea. Using the panel data for 155 local governments in Korea during 2002–2009 periods, we estimated the OLS, the fixed effect model and the random effect model for the aggregate regional productionfunction. We selected an optimal model among three models using Hausman test estimates.

Above all we found that there exist significant neighborhood effects for labor and capital inputs in the private sector and the public expenditures of local governments. Specifically, there exists negative spillover effect for labor inputs while there exists positive spillover effects for capital stock in the private sector as well as public expenditures of local governments. It implies that the adjacent local provinces compete each other for obtaining labor forces. There exists positive spillover effects of local public expenditures of neighborhood local governments. The estimation results from the per capita GRDP equation supports the hypothesis that the region surrounded by affluent neighborhood regions are inclined to be affluent.

It is very crucial for the Korean centralgovernment to form the optimal size of local provinces based on the empirical findings on the spillover effects from public expenditures.