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A Generalized Spatial Panel Data Model with Random Effects

  • Badi H. Baltagi
  • Peter Egger
  • Michael Pfaffermayr

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 et al. (2007). Our encompassing specification allows us to test for these models as restricted specifications. In particular, we derive three Lagrange multiplier (LM) and likelihood ration (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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File URL: http://hdl.handle.net/10.1080/07474938.2012.742342
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Article provided by Taylor & Francis Journals in its journal Econometric Reviews.

Volume (Year): 32 (2013)
Issue (Month): 5-6 (August)
Pages: 650-685

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Handle: RePEc:taf:emetrv:v:32:y:2013:i:5-6:p:650-685
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  1. M. Hashem Pesaran & Elisa Tosetti, 2011. "Large panels with common factors and spatial correlation," Post-Print peer-00796743, HAL.
  2. Pesaran, M. Hashem & Tosetti, Elisa, 2011. "Large panels with common factors and spatial correlation," Journal of Econometrics, Elsevier, vol. 161(2), pages 182-202, April.
  3. Baltagi, Badi H. & Song, Seuck Heun & Koh, Won, 2003. "Testing panel data regression models with spatial error correlation," Journal of Econometrics, Elsevier, vol. 117(1), pages 123-150, November.
  4. Chudik, A. & Pesaran, M.H. & Tosetti, E., 2009. "Weak and Strong Cross Section Dependence and Estimation of Large Panels," Cambridge Working Papers in Economics 0924, Faculty of Economics, University of Cambridge.
  5. repec:cup:cbooks:9780521537469 is not listed on IDEAS
  6. Kelejian, Harry H. & Prucha, Ingmar R., 2010. "Specification and estimation of spatial autoregressive models with autoregressive and heteroskedastic disturbances," Journal of Econometrics, Elsevier, vol. 157(1), pages 53-67, July.
  7. Lee, Lung-fei & Yu, Jihai, 2010. "Estimation of spatial autoregressive panel data models with fixed effects," Journal of Econometrics, Elsevier, vol. 154(2), pages 165-185, February.
  8. Zhenlin Yang, 2009. "A Robust LM Test for Spatial Error Components," Development Economics Working Papers 22488, East Asian Bureau of Economic Research.
  9. Vasilis Sarafidis & Tom Wansbeek, 2012. "Cross-Sectional Dependence in Panel Data Analysis," Econometric Reviews, Taylor & Francis Journals, vol. 31(5), pages 483-531, September.
  10. Kapoor, Mudit & Kelejian, Harry H. & Prucha, Ingmar R., 2007. "Panel data models with spatially correlated error components," Journal of Econometrics, Elsevier, vol. 140(1), pages 97-130, September.
  11. Lung-Fei Lee, 2004. "Asymptotic Distributions of Quasi-Maximum Likelihood Estimators for Spatial Autoregressive Models," Econometrica, Econometric Society, vol. 72(6), pages 1899-1925, November.
  12. M. Hashem Pesaran & Elisa Tosetti, 2011. "Large panels with common factors and spatial correlation," Post-Print hal-00796743, HAL.
  13. 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.
  14. H. Kelejian, Harry & Prucha, Ingmar R., 2001. "On the asymptotic distribution of the Moran I test statistic with applications," Journal of Econometrics, Elsevier, vol. 104(2), pages 219-257, September.
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