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Where is the Economics in Spatial Econometrics?

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  • Luisa Corrado
  • Bernard Fingleton

Abstract

Spatial econometrics has been criticized by some economists because some model specifications have been driven by data-analytic considerations rather than having a firm foundation in economic theory. In particular this applies to the so-called W matrix, which is integral to the structure of endogenous and exogenous spatial lags, and to spatial error processes, and which are almost the sine qua non of spatial econometrics. Moreover it has been suggested that the significance of a spatially lagged dependent variable involving W may be misleading, since it may be simply picking up the effects of omitted spatially dependent variables, incorrectly suggesting the existence of a spillover mechanism. In this paper we review the theoretical and empirical rationale for network dependence and spatial externalities as embodied in spatially lagged variables, arguing that failing to acknowledge their presence at least leads to biased inference, can be a cause of inconsistent estimation, and leads to an incorrect understanding of true causal processes.

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Bibliographic Info

Paper provided by Spatial Economics Research Centre, LSE in its series SERC Discussion Papers with number 0071.

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Date of creation: Mar 2011
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Handle: RePEc:cep:sercdp:0071

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Web page: http://www.spatialeconomics.ac.uk/SERC/publications/default.asp

Related research

Keywords: Spatial econometrics; endogenous spatial lag; exogenous spatial lag; spatiallydependent errors; network dependence; externalities; the W matrix; panel data with spatialeffects; multilevel models with spatial effects;

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  1. Put some economics back into spatial econometrics
    by Economic Logician in Economic Logic on 2012-05-25 14:54:00
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