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Spatial Lag Models with Nested Random Effects: An Instrumental Variable Procedure with an Application to English House Prices

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Abstract

This paper sets up a nested random effects spatial autoregressive panel data model to explain annual house price variation for 2000-2007 across 353 local authority districts in England. The estimation problem posed is how to allow for the endogeneity of the spatial lag variable producing the simultaneous spatial spillover of prices across districts together with the nested random effects in a panel data setting. To achieve this, the paper proposes new estimators based on the instrumental variable approaches of Kelejian and Prucha (1998) and Lee (2003) for the cross-sectional spatial autoregressive model. Monte Carlo results show that our estimators perform well relative to alternative approaches and produces estimates based on real data that are consistent with the theoretical house price model underpinning the reduced form.

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File URL: http://www.maxwell.syr.edu/uploadedFiles/cpr/publications/working_papers2/wp161.pdf
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Bibliographic Info

Paper provided by Center for Policy Research, Maxwell School, Syracuse University in its series Center for Policy Research Working Papers with number 161.

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Length: 33 pages
Date of creation: Nov 2013
Date of revision:
Handle: RePEc:max:cprwps:161

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Keywords: House Prices; Panel Data; Spatial Lag; Nested Random Effects; In-strumental Variables; Spatial Dependence;

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  1. Jørgen Lauridsen & Reinhold Kosfeld, 2006. "A test strategy for spurious spatial regression, spatial nonstationarity, and spatial cointegration," Papers in Regional Science, Wiley Blackwell, vol. 85(3), pages 363-377, 08.
  2. Bernard Fingleton, 2009. "Simulating wages and house prices using the NEG," LSE Research Online Documents on Economics 33209, London School of Economics and Political Science, LSE Library.
  3. J. Elhorst, 2010. "Applied Spatial Econometrics: Raising the Bar," Spatial Economic Analysis, Taylor & Francis Journals, vol. 5(1), pages 9-28.
  4. Bernard Fingleton, 2006. "A cross-sectional analysis of residential property prices: the effects of income, commuting, schooling, the housing stock and spatial interaction in the English regions," Papers in Regional Science, Wiley Blackwell, vol. 85(3), pages 339-361, 08.
  5. Badi H. Baltagi & Chihwa Kao & Long Liu, 2012. "The Estimation and Testing of a Linear Regression with Near Unit Root in the Spatial Autoregressive Error Term," Center for Policy Research Working Papers 150, Center for Policy Research, Maxwell School, Syracuse University.
  6. Hanson, G.H., 1999. "`Market Potential, Increasing Returns, and Geographic Concentration," Working Papers 439, Research Seminar in International Economics, University of Michigan.
  7. Matthew J. Higgins & Daniel Levy & Andrew T. Young, 2006. "Growth and Convergence across the United States: Evidence from County-Level Data," The Review of Economics and Statistics, MIT Press, vol. 88(4), pages 671-681, November.
  8. Lauridsen, J. & Kosfeld, R., 2004. "A wald Test for Spatial Nonstationarity," Estudios de Economía Aplicada, Estudios de Economía Aplicada, vol. 22, pages 1-12, Diciembre.
  9. Lung-Fei Lee & Jihai Yu, 2013. "Near Unit Root in the Spatial Autoregressive Model," Spatial Economic Analysis, Taylor & Francis Journals, vol. 8(3), pages 314-351, September.
  10. Montmarquette, Claude & Mahseredjian, Sophie, 1989. "Does School Matter for Educational Achievement? A Two-Way Nested-Error Components Analysis," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 4(2), pages 181-93, April-Jun.
  11. J. A. Hausman, 1976. "Specification Tests in Econometrics," Working papers 185, Massachusetts Institute of Technology (MIT), Department of Economics.
  12. Bernard Fingleton, 2008. "A generalized method of moments estimator for a spatial model with moving average errors, with application to real estate prices," Empirical Economics, Springer, vol. 34(1), pages 35-57, February.
  13. Manski, Charles F, 1993. "Identification of Endogenous Social Effects: The Reflection Problem," Review of Economic Studies, Wiley Blackwell, vol. 60(3), pages 531-42, July.
  14. Corrado, L. & Fingleton, B., 2011. "Where is the economics in spatial econometrics?," SIRE Discussion Papers 2011-02, Scottish Institute for Research in Economics (SIRE).
  15. Badi H. Baltagi & Long Liu, 2011. "Instrument Variable Estimation of a Spatial Autoregressive Panel Model with Random Effects," Center for Policy Research Working Papers 127, Center for Policy Research, Maxwell School, Syracuse University.
  16. Lung-fei Lee, 2003. "Best Spatial Two-Stage Least Squares Estimators for a Spatial Autoregressive Model with Autoregressive Disturbances," Econometric Reviews, Taylor & Francis Journals, vol. 22(4), pages 307-335.
  17. Kelejian, Harry H & Prucha, Ingmar R, 1998. "A Generalized Spatial Two-Stage Least Squares Procedure for Estimating a Spatial Autoregressive Model with Autoregressive Disturbances," The Journal of Real Estate Finance and Economics, Springer, vol. 17(1), pages 99-121, July.
  18. Glaeser, Edward L., 2008. "Cities, Agglomeration, and Spatial Equilibrium," OUP Catalogue, Oxford University Press, number 9780199290444.
  19. Bernard Fingleton & Julie Le Gallo, 2008. "Estimating spatial models with endogenous variables, a spatial lag and spatially dependent disturbances: Finite sample properties," Papers in Regional Science, Wiley Blackwell, vol. 87(3), pages 319-339, 08.
  20. Michael Beenstock & Dan Feldman & Daniel Felsenstein, 2012. "Testing for Unit Roots and Cointegration in Spatial Cross-Section Data," Spatial Economic Analysis, Taylor & Francis Journals, vol. 7(2), pages 203-222, June.
  21. Luc Anselin, 2010. "Thirty years of spatial econometrics," Papers in Regional Science, Wiley Blackwell, vol. 89(1), pages 3-25, 03.
  22. Badi Baltagi & Seuck Heun Song & Byoung Cheol Jung, 2002. "Simple Lm Tests For The Unbalanced Nested Error Component Regression Model," Econometric Reviews, Taylor & Francis Journals, vol. 21(2), pages 167-187.
  23. Steven Brakman & Harry Garretsen & Marc Schramm, 2004. "The Spatial Distribution of Wages: Estimating the Helpman-Hanson Model for Germany," Journal of Regional Science, Wiley Blackwell, vol. 44(3), pages 437-466.
  24. Mark D. Partridge, 2005. "Does Income Distribution Affect U.S. State Economic Growth?," Journal of Regional Science, Wiley Blackwell, vol. 45(2), pages 363-394.
  25. Bernard Fingleton, 2008. "A Generalized Method of Moments Estimator for a Spatial Panel Model with an Endogenous Spatial Lag and Spatial Moving Average Errors," Spatial Economic Analysis, Taylor & Francis Journals, vol. 3(1), pages 27-44.
  26. Antweiler, Werner, 2001. "Nested random effects estimation in unbalanced panel data," Journal of Econometrics, Elsevier, vol. 101(2), pages 295-313, April.
  27. H. Baltagi, Badi & Heun Song, Seuck & Cheol Jung, Byoung, 2001. "The unbalanced nested error component regression model," Journal of Econometrics, Elsevier, vol. 101(2), pages 357-381, April.
  28. Luisa Corrado & Bernard Fingleton, 2011. "Multilevel Modelling with Spatial Effects," Working Papers 1105, University of Strathclyde Business School, Department of Economics.
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