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Fixed-$T$ Dynamic Spatial Panel Model with Common Shocks

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  • Jushan Bai
  • Jesse Chieh Chen

Abstract

We study a dynamic spatial panel model with observed regressors, interactive effects, and contemporaneous and lagged dependence in a large-$N$, fixed-$T$ framework. The spatial model constitutes an $N$-dimensional simultaneous-equations system. In this $N$-equation view, the interactive effects introduce $N$ unit-specific loading vectors. Estimating them individually when $T$ is fixed creates the type of incidental-parameters problem underlying Nickell bias. We use the $N$-equation view to account for spatial simultaneity through the spatial Jacobian. Crucially, however, we view the same model as a $T$-equation system with $N$ observations. Together with a spatially enriched random-loadings (SERL) specification, this $T$-equation view yields a quasi-likelihood without unit-specific incidental parameters. We propose a computationally tractable block-coordinate algorithm. Simulations show small estimation errors and generally near-nominal coverage probabilities. Applying the method to U.S. county female labor-force participation, we find substantial dynamic and spatial dependence and an important role for education in explaining the rise in female labor-force participation.

Suggested Citation

  • Jushan Bai & Jesse Chieh Chen, 2026. "Fixed-$T$ Dynamic Spatial Panel Model with Common Shocks," Papers 2608.22499, arXiv.org.
  • Handle: RePEc:arx:papers:2608.22499
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    File URL: https://arxiv.org/pdf/2608.22499
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