Regional economy size and the growth-instability frontier: Evidence from Europe

Predictions of the portfolio model of the economy are tested using regional growth data from Europe. It is shown that more aggregated regions of Europe tend to be more economically diverse than more disaggregated regions. Then, using different frontier estimation methods, evidence of a convex growth-instability frontier for aggregated regions is presented. At the most regionally disaggregated level for which there are data, there is weak if any evidence of the frontier. The results suggest that large economies are appropriately modeled as portfolios, whose growth processes are characterized by the convex growth-instability frontier, whereas small local economies do not display this characteristic.