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Abstract Direct effects of regional development interventions on targeted areas may be amplified by positive spillovers from elsewhere or offset by negative spillovers. Yet spillovers are often ignored in the applied literature, where impact analyses based on difference-in-differences typically treat spatial units as independent of their neighbours. We study spatial spillovers from a popular regional development intervention in China—converting counties to cities. China’s top-down approach lets only central government bestow city status on an area, with over ten percent of counties upgraded to cities in the last two decades. A growing literature estimates impacts of these conversions, with spatial units typically treated as independent of their neighbours. In contrast, our spatial econometric models use a 20-year panel for almost 2500 county-level units to allow indirect spillover effects on indicators of local economic activity. The positive direct effects on GDP and luminosity of a county being upgraded are amplified through positive indirect effects, especially in the eastern regions of China where economic activity and population are more densely concentrated. The models without spatial lags that ignore spillovers give estimated effects of converting counties to cities that are only two-fifths to two-thirds as large as the estimated effects coming from the spatial models.
Zhang et al. (Tue,) studied this question.