How institutions shape the economic returns to investment in European regions?

Álvarez, Inmaculada C., Barbero, Javier, Orea, Luis and Rodríguez-Pose, Andrés ORCID: 0000-0002-8041-0856 (2025) How institutions shape the economic returns to investment in European regions? Economic Modelling. ISSN 0264-9993 (In Press)

Text (Economic Modelling 2025 final working paper version) - Accepted Version Pending embargo until 1 January 2100. Available under License Creative Commons Attribution. Download (2MB)

Abstract

Most studies of institutional quality and regional growth assume uniform effects across territories. However, this may mask crucial regional heterogeneity, with direct policy implications. We use a latent class framework applied to 230 EU regions over 2009-2017 to identify institution-driven regional parameter groups, and to examine both average effects and catching-up effects associated with changes in the institutional environment. We demonstrate that institutional quality generates highly variable returns to investment in physical capital and innovation. Nordic and Central European regions show highest returns to physical capital and R&D investment, whereas less-developed regions benefit most from education spending. Crucially, we find that improving government quality not only raises average returns but also promotes territorial cohesion. By contrast, regional autonomy shows limited impact on returns. Our findings challenge the one-size-fits-all approach to cohesion policy and indicate that cohesion policy should explicitly promote institutional improvements in addition to capital deployment.

Item Type:	Article
Additional Information:	© 2026 The Author(s)
Divisions:	Geography and Environment
Subjects:	H Social Sciences > HB Economic Theory
JEL classification:	E - Macroeconomics and Monetary Economics > E6 - Macroeconomic Policy Formation, Macroeconomic Aspects of Public Finance, Macroeconomic Policy, and General Outlook > E61 - Policy Objectives; Policy Designs and Consistency; Policy Coordination H - Public Economics > H5 - National Government Expenditures and Related Policies > H54 - Infrastructures; Other Public Investment and Capital Stock R - Urban, Rural, and Regional Economics > R1 - General Regional Economics > R11 - Regional Economic Activity: Growth, Development, and Changes
Date Deposited:	23 Dec 2025 00:02
Last Modified:	23 Dec 2025 00:02
URI:	http://eprints.lse.ac.uk/id/eprint/130747

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