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Interaction matrix selection in spatial autoregressive models with an application to growth theory

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  • Debarsy, Nicolas
  • Ertur, Cem

Abstract

The interaction matrix, or spatial weight matrix, is the fundamental tool to model cross-sectional interdependence between observations in spatial autoregressive models. However, it is most of the time not derived from theory, as it should be ideally, but chosen on an ad hoc basis. In this paper, we propose a modified version of the J test to formally select the interaction matrix. Our methodology is based on the application of the robust against unknown heteroskedasticity GMM estimation method, developed by Lin and Lee (2010). We then implement the testing procedure developed by Hagemann (2012) to overcome the decision problem inherent to non-nested models tests. An application of the testing procedure is presented for the Schumpeterian growth model with worldwide interactions developed by Ertur and Koch (2011) using three different types of interaction matrices: genealogic distance, linguistic distance and bilateral trade flows. We find that the interaction matrix based on trade flows is the most adequate.

Suggested Citation

  • Debarsy, Nicolas & Ertur, Cem, 2019. "Interaction matrix selection in spatial autoregressive models with an application to growth theory," Regional Science and Urban Economics, Elsevier, vol. 75(C), pages 49-69.
  • Handle: RePEc:eee:regeco:v:75:y:2019:i:c:p:49-69
    DOI: 10.1016/j.regsciurbeco.2019.01.002
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    More about this item

    Keywords

    Bootstrap; GMM; Interaction matrix; J tests; Non-nested models; Heteroskedasticity; SAR;
    All these keywords.

    JEL classification:

    • C21 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Cross-Sectional Models; Spatial Models; Treatment Effect Models
    • C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Hypothesis Testing: General
    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
    • O4 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity

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