I illustrate the importance of choosing the correct space in empirical applications of spatial econometric models. I consider different spatial weighting matrices in an SAR(1) model -- contiguity matrix, distance based matrix and their variants adjusted for size of each observation. I show formally that only the modified weighting matrices imply specifications that are robust to changes in the sample size. I demonstrate the effect of spatial misspecification by presenting simulations of a regional convergence model. The different specification of space are also estimated using European regional data. The results confirm the sensitivity of the conclusion with respect to the choice of the space.
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Find related papers by JEL classification: C21 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Cross-Sectional Models; Spatial Models; Treatment Effect Models O47 - Economic Development, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Measurement of Economic Growth; Aggregate Productivity; Cross-Country Output Convergence R11 - Urban, Rural, and Regional Economics - - General Regional Economics - - - Analysis of Growth, Development, and Changes
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