Geographical Economics and Income Disparities Across Ecuadorian Regions: Analysis for the period 2007-2014

Abstract

[Abstract] This paper focuses on the analysis of the role played by market potential in the spatial income structure observed in Ecuador over the period 2007-2014. Based on the geographical economics theory we derive the so called nominal wage equation which establishes a relationship between nominal wages and a distance weighted sum of the volume of economic activities in surrounding locations which is usually known as market potential. The estimation of this equation using Ecuadorian provincial data over the period 2007-2014 reveals that market potential plays a crucial role in explanation of the spatial distribution of per capita income. The results of our estimations are robust to the potential endogeneity problems of market potential which have been dealt with by using historical values of market potential and instrumental variables. Finally, we have also discovered a potential channel that could be affecting the spatial structure of per capita income in Ecuador, which is human capital.