Testing for error cross section independence with an application to US health expenditure
AbstractThis paper considers the problem of testing for error cross section independence in a panel where statistical units may be subject to unobserved common effects, spatial spill overs, or both. We review a number of diagnostics that are used for testing for error cross section independence in panels, including tests based on spacings and spatial statistics. We then argue that commonly used spatial statistics might give misleading results when cross section correlation arising from common effects is not taken into account. Hence, we study the properties of spatial statistics applied to residuals obtained from an augmented regression, where common factors have been approximated by principal components (Bai, 2009). Small sample properties of our testing strategy are investigated in a Monte Carlo study. Results show that spatial tests applied to de-factored residuals detect well the presence of spatial correlation in the data. The paper concludes with a small empirical exercise on US health expenditure.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
Bibliographic InfoArticle provided by Elsevier in its journal Regional Science and Urban Economics.
Volume (Year): 40 (2010)
Issue (Month): 5 (September)
Contact details of provider:
Web page: http://www.elsevier.com/locate/regec
Panels Factor models Testing for spatial correlation Health expenditure;
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Andrew W. Lo, A. Craig MacKinlay, 1988.
"Stock Market Prices do not Follow Random Walks: Evidence from a Simple Specification Test,"
Review of Financial Studies,
Society for Financial Studies, vol. 1(1), pages 41-66.
- Andrew W. Lo & A. Craig MacKinlay, 1989. "Stock Market Prices Do Not Follow Random Walks: Evidence From a Simple Specification Test," NBER Working Papers 2168, National Bureau of Economic Research, Inc.
- Tom Doan, . "VRATIO: RATS procedure to implement variance ratio unit root test procedure," Statistical Software Components RTS00231, Boston College Department of Economics.
- Baltagi B-H & Bresson G. & Pirotte A., 2005.
"Panel Unit Root Tests and Spatial Dependence,"
Working Papers ERMES
0503, ERMES, University Paris 2.
- Federico Revelli, 2002. "Testing the taxmimicking versus expenditure spill-over hypotheses using English data," Applied Economics, Taylor and Francis Journals, vol. 34(14), pages 1723-1731.
- Daniel Birke, 2009.
"The Economics Of Networks: A Survey Of The Empirical Literature,"
Journal of Economic Surveys,
Wiley Blackwell, vol. 23(4), pages 762-793, 09.
- Daniel Birke, 2008. "The economics of networks - A survey of the empirical literature," Occasional Papers 22, Industrial Economics Division.
- Cooper, Russell & Haltiwanger, John, 1996.
"Evidence on Macroeconomic Complementarities,"
The Review of Economics and Statistics,
MIT Press, vol. 78(1), pages 78-93, February.
- Jonathan Skinner & Douglas Staiger, 2007.
"Technology Adoption from Hybrid Corn to Beta-Blockers,"
in: Hard-to-Measure Goods and Services: Essays in Honor of Zvi Griliches, pages 545-570
National Bureau of Economic Research, Inc.
- Jonathan Skinner & Douglas Staiger, 2005. "Technology adoption from hybrid corn to beta blockers," Proceedings, Federal Reserve Bank of San Francisco.
- Jonathan Skinner & Douglas Staiger, 2005. "Technology Adoption From Hybrid Corn to Beta Blockers," NBER Working Papers 11251, National Bureau of Economic Research, Inc.
- Revelli, Federico, 2006.
"Performance rating and yardstick competition in social service provision,"
Journal of Public Economics,
Elsevier, vol. 90(3), pages 459-475, February.
- Federico Revelli, 2004. "Performance Rating and Yardstick Competition in Social Service Provision," CESifo Working Paper Series 1270, CESifo Group Munich.
- Carrion-i-Silvestre, Josep Lluis, 2005. "Health care expenditure and GDP: Are they broken stationary?," Journal of Health Economics, Elsevier, vol. 24(5), pages 839-854, September.
- Rivera-Batiz, Luis A & Romer, Paul M, 1991.
"Economic Integration and Endogenous Growth,"
The Quarterly Journal of Economics,
MIT Press, vol. 106(2), pages 531-55, May.
- Jushan Bai & Serena Ng, 2000.
"Determining the Number of Factors in Approximate Factor Models,"
Boston College Working Papers in Economics
440, Boston College Department of Economics.
- Jushan Bai & Serena Ng, 2002. "Determining the Number of Factors in Approximate Factor Models," Econometrica, Econometric Society, vol. 70(1), pages 191-221, January.
- Jushan Bai & Serena Ng, 2000. "Determining the Number of Factors in Approximate Factor Models," Econometric Society World Congress 2000 Contributed Papers 1504, Econometric Society.
- Peter C. B. Phillips & Donggyu Sul, 2003. "Dynamic panel estimation and homogeneity testing under cross section dependence *," Econometrics Journal, Royal Economic Society, vol. 6(1), pages 217-259, 06.
- William A. Brock & Steven N. Durlauf, 2000.
00-05-028, Santa Fe Institute.
- Hitiris, Theo & Posnett, John, 1992. "The determinants and effects of health expenditure in developed countries," Journal of Health Economics, Elsevier, vol. 11(2), pages 173-181, August.
- Chou, Win Lin, 2007. "Explaining China's regional health expenditures using LM-type unit root tests," Journal of Health Economics, Elsevier, vol. 26(4), pages 682-698, July.
- Ng, Serena, 2006. "Testing Cross-Section Correlation in Panel Data Using Spacings," Journal of Business & Economic Statistics, American Statistical Association, vol. 24, pages 12-23, January.
- Forni, Mario & Reichlin, Lucrezia, 1998.
"Let's Get Real: A Factor Analytical Approach to Disaggregated Business Cycle Dynamics,"
Review of Economic Studies,
Wiley Blackwell, vol. 65(3), pages 453-73, July.
- Mario Forni & Lucrezia Reichlin, 1998. "Let's get real: a factor analytical approach to disaggregated business cycle dynamics," ULB Institutional Repository 2013/10147, ULB -- Universite Libre de Bruxelles.
- Donald W.K. Andrews, 2003.
"Cross-section Regression with Common Shocks,"
Cowles Foundation Discussion Papers
1428, Cowles Foundation for Research in Economics, Yale University.
- M. Hashem Pesaran, 2004.
"General Diagnostic Tests for Cross Section Dependence in Panels,"
CESifo Working Paper Series
1229, CESifo Group Munich.
- Pesaran, M. Hashem, 2004. "General Diagnostic Tests for Cross Section Dependence in Panels," IZA Discussion Papers 1240, Institute for the Study of Labor (IZA).
- Pesaran, M.H., 2004. "‘General Diagnostic Tests for Cross Section Dependence in Panels’," Cambridge Working Papers in Economics 0435, Faculty of Economics, University of Cambridge.
- H. Kelejian, Harry & Prucha, Ingmar R., 2001. "On the asymptotic distribution of the Moran I test statistic with applications," Journal of Econometrics, Elsevier, vol. 104(2), pages 219-257, September.
- M. Hashem Pesaran, 2004.
"Estimation and Inference in Large Heterogeneous Panels with a Multifactor Error Structure,"
CESifo Working Paper Series
1331, CESifo Group Munich.
- M. Hashem Pesaran, 2006. "Estimation and Inference in Large Heterogeneous Panels with a Multifactor Error Structure," Econometrica, Econometric Society, vol. 74(4), pages 967-1012, 07.
- Moscone, Francesco & Knapp, Martin & Tosetti, Elisa, 2007. "Mental health expenditure in England: A spatial panel approach," Journal of Health Economics, Elsevier, vol. 26(4), pages 842-864, July.
- Jan K. Brueckner, 1999. "Welfare Reform and the Race to the Bottom: Theory and Evidence," Southern Economic Journal, Southern Economic Association, vol. 66(2), pages 505-525, January.
- Jushan Bai, 2003. "Inferential Theory for Factor Models of Large Dimensions," Econometrica, Econometric Society, vol. 71(1), pages 135-171, January.
- Di Matteo, Livio & Di Matteo, Rosanna, 1998. "Evidence on the determinants of Canadian provincial government health expenditures: 1965-1991," Journal of Health Economics, Elsevier, vol. 17(2), pages 211-228, April.
- Donald Robertson & James Symons, 2000. "Factor Residuals in SUR Regressions: Estimating Panels Allowing for Cross Sectional Correlation," CEP Discussion Papers dp0473, Centre for Economic Performance, LSE.
- Donald Freeman, 2003. "Is health care a necessity or a luxury? Pooled estimates of income elasticity from US state-level data," Applied Economics, Taylor and Francis Journals, vol. 35(5), pages 495-502.
- Baicker, Katherine, 2005. "The spillover effects of state spending," Journal of Public Economics, Elsevier, vol. 89(2-3), pages 529-544, February.
- Francesco Moscone & Elisa Tosetti, 2009. "A Review And Comparison Of Tests Of Cross-Section Independence In Panels," Journal of Economic Surveys, Wiley Blackwell, vol. 23(3), pages 528-561, 07.
- Jushan Bai, 2009. "Panel Data Models With Interactive Fixed Effects," Econometrica, Econometric Society, vol. 77(4), pages 1229-1279, 07.
- Maddala, G S & Wu, Shaowen, 1999. " A Comparative Study of Unit Root Tests with Panel Data and a New Simple Test," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 61(0), pages 631-52, Special I.
- Massimo Filippini & Fabian Heimsch & Giuliano Masiero, 2013. "Antibiotic consumption and the role of dispensing physicians," CEPRA working paper 1302, USI Università della Svizzera italiana.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Wendy Shamier).
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.