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Market potential has been shown to have an important impact on the explanation of observed income disparities both across countries and across regions within countries. However, the importance of neighbourhood for ‘income levels-market potential’ regressions is largely neglected in the empirical studies on the subject. This paper tries to fill up this gap by estimating fixed effects spatial panel data models using Colombian regional data over the period 1990–2015. Our results reveal that around half of the impact of market potential on regional income disparities can be attributed to neighbouring regions.

Income disparities in Colombia: market potential and neighborhood effects