The dynamics of related and unrelated variety across time and space: evidence from Italian regions

Many recent studies demonstrate that related and unrelated variety are important factors to make regions resilient after a negative economic shock. No study yet has investigated which elements determine the degree of related and unrelated variety of a region, and how these elements affect the evolution of variety over time, particularly in relation with the recent economic crisis. Following recent works in the evolutionary economic geography literature, this paper focuses on formal institutions, captured by the quality of regional governance. From the estimates of fixed effects and dynamic panel models, we find that institutional quality per se does not affect related and unrelated variety. Instead, we find that higher institutional quality stimulates related variety under two circumstances: when it is specified in terms of lower corruption, and only in times of economic downturn.