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A Generalized Spatial Panel Data Model with Random Effects

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  • Badi H. Baltagi
  • Peter Egger
  • Michael Pfaffermayr

Abstract

This paper proposes a generalized panel data model with random effects and first-order spatially autocorrelated residuals that encompasses two previously suggested specifications. The first one is described in Anselin’s (1988) book and the second one by Kapoor, Kelejian, and Prucha (2007). Our encompassing specification allows us to test for these models as restricted specifications. In particular, we derive three LM and LR tests that restrict our generalized model to obtain (i) the Anselin model, (ii) the Kapoor, Kelejian, and Prucha model, and (iii) the simple random effects model that ignores the spatial correlation in the residuals. For two of these three tests, we obtain closed form solutions and we derive their large sample distributions. Our Monte Carlo results show that the suggested tests are powerful in testing for these restricted specifications even in small and medium sized samples.

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Bibliographic Info

Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 3930.

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Date of creation: 2012
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Handle: RePEc:ces:ceswps:_3930

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Keywords: panel data; spatially autocorrelated residuals; maximum-likelihood estimation; Lagrange multiplier; likelihood ratio;

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References

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  1. Pesaran, M.H. & Tosetti, E., 2007. "Large Panels with Common Factors and Spatial Correlations," Cambridge Working Papers in Economics, Faculty of Economics, University of Cambridge 0743, Faculty of Economics, University of Cambridge.
  2. Alexander Chudik & M. Hashem Pesaran & Elisa Tosetti, 2011. "Weak and strong cross‐section dependence and estimation of large panels," Econometrics Journal, Royal Economic Society, Royal Economic Society, vol. 14(1), pages C45-C90, February.
  3. Lung-Fei Lee, 2004. "Asymptotic Distributions of Quasi-Maximum Likelihood Estimators for Spatial Autoregressive Models," Econometrica, Econometric Society, Econometric Society, vol. 72(6), pages 1899-1925, November.
  4. Abadir,Karim M. & Magnus,Jan R., 2005. "Matrix Algebra," Cambridge Books, Cambridge University Press, Cambridge University Press, number 9780521537469.
  5. Zhenlin Yang, 2009. "A Robust LM Test for Spatial Error Components," Working Papers, Singapore Management University, School of Economics 04-2009, Singapore Management University, School of Economics.
  6. Sarafidis, Vasilis & Wansbeek, Tom, 2010. "Cross-sectional Dependence in Panel Data Analysis," MPRA Paper 20367, University Library of Munich, Germany.
  7. Baltagi, Badi H. & Song, Seuck Heun & Koh, Won, 2003. "Testing panel data regression models with spatial error correlation," Journal of Econometrics, Elsevier, Elsevier, vol. 117(1), pages 123-150, November.
  8. Kelejian, Harry H. & Prucha, Ingmar R., 2010. "Specification and estimation of spatial autoregressive models with autoregressive and heteroskedastic disturbances," Journal of Econometrics, Elsevier, Elsevier, vol. 157(1), pages 53-67, July.
  9. H. Kelejian, Harry & Prucha, Ingmar R., 2001. "On the asymptotic distribution of the Moran I test statistic with applications," Journal of Econometrics, Elsevier, Elsevier, vol. 104(2), pages 219-257, September.
  10. Lee, Lung-fei & Yu, Jihai, 2010. "Estimation of spatial autoregressive panel data models with fixed effects," Journal of Econometrics, Elsevier, Elsevier, vol. 154(2), pages 165-185, February.
  11. Harry H. Kelejian & Ingmar R. Prucha, 2008. "Specification and Estimation of Spatial Autoregressive Models with Autoregressive and Heteroskedastic Disturbances," CESifo Working Paper Series 2448, CESifo Group Munich.
  12. Kapoor, Mudit & Kelejian, Harry H. & Prucha, Ingmar R., 2007. "Panel data models with spatially correlated error components," Journal of Econometrics, Elsevier, Elsevier, vol. 140(1), pages 97-130, September.
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