Pii: S0014-2921(01)00166-0

This paper o"ers an explanation for the coexistence of convergence across countries and the lack thereof at the regional level in the European Union. The model shows that, even if it accelerates growth and brings convergence across countries, the intensi5cation of international knowledge spillovers due to more cross-country interaction may exacerbate within-country regional disparities, if regions with di"erent specialization do not bene5t evenly from the exchange of knowledge. The empirical evidence supports the implications of the model. In particular, the data show that regions specialized in advanced sectors at the beginning of the sample period became more similar in terms of per capita income, while regions specialized in traditional sectors lagged. c © 2002 Elsevier Science B.V. All rights reserved. JEL classi"cation: O52; O41; O18; F15