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The spatial structure of French wages: Investigating the robustness of two-stage least squares estimations of spatial autoregressive models

Two stage least squares are a popular method of estimation of spatial auto-regressive models, where the dependent variable in an area is a function of the value of the same variable in contiguous areas. Existing literature on this topic points out, however, that this creates problems of consistency. Nevertheless, studies such as Fingleton (2003) show that such an approach is being used to test the central hypothesis of New Economic Geography that increasing returns to agglomeration lead to the concentration of economic activity. It is therefore important to investigate the validity of the methodology in this case. The focus of this study is twofold: first to replicate the methodology of Fingleton (2003) on the French case and investigate the presence of increasing returns to agglomeration in the spatial structure of wages in France. Secondly, because of the econometric problems inherent to the specification pointed out in the literature, the study tests the validity and robustness of the results obtained. The first central finding is the significant presence of such returns to scale for France, similar to the ones found in the UK and in other studies of French spatial wage disparities. The second finding is that rigorous tests on the instrumentation strategy defined in Fingleton (2003) reveal that the instruments are typically strong and lead to consistent estimates. Finally, the methodology is shown to be robust to changes in the specification of the spatial weights matrix, and that taking into account a larger time-dimension through a simple pooled regression is valid and leads to an improvement of the significance of the parameters.

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Paper provided by Observatoire Francais des Conjonctures Economiques (OFCE) in its series Documents de Travail de l'OFCE with number 2008-03.

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Date of creation: 2008
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Handle: RePEc:fce:doctra:0803
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  1. Gilles Duranton & Henry G. Overman, 2005. "Testing for localization using micro-geographic data," LSE Research Online Documents on Economics 581, London School of Economics and Political Science, LSE Library.
  2. Harry H. Kelejian & Ingmar R. Prucha, 1997. "Estimation of Spatial Regression Models with Autoregressive Errors by Two Stage Least Squares Procedures: A Serious Problem," Electronic Working Papers 97-001, University of Maryland, Department of Economics.
  3. Ellison, Glenn & Glaeser, Edward L, 1997. "Geographic Concentration in U.S. Manufacturing Industries: A Dartboard Approach," Journal of Political Economy, University of Chicago Press, vol. 105(5), pages 889-927, October.
  4. Dixit, Avinash K & Stiglitz, Joseph E, 1975. "Monopolistic Competition and Optimum Product Diversity," The Warwick Economics Research Paper Series (TWERPS) 64, University of Warwick, Department of Economics.
  5. Brakman, Steven & Garretsen, Harry & Schramm, Marc, 2006. "Putting new economic geography to the test: Free-ness of trade and agglomeration in the EU regions," Regional Science and Urban Economics, Elsevier, vol. 36(5), pages 613-635, September.
  6. Head, Keith & Mayer, Thierry, 2004. "The empirics of agglomeration and trade," Handbook of Regional and Urban Economics, in: J. V. Henderson & J. F. Thisse (ed.), Handbook of Regional and Urban Economics, edition 1, volume 4, chapter 59, pages 2609-2669 Elsevier.
  7. Fujita, M. & Thisse, J.-F., . "Economics of agglomeration," CORE Discussion Papers RP -1250, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  8. Masahisa Fujita & Paul Krugman & Anthony J. Venables, 2001. "The Spatial Economy: Cities, Regions, and International Trade," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262561476, June.
  9. Duranton, Gilles & Puga, Diego, 2004. "Micro-foundations of urban agglomeration economies," Handbook of Regional and Urban Economics, in: J. V. Henderson & J. F. Thisse (ed.), Handbook of Regional and Urban Economics, edition 1, volume 4, chapter 48, pages 2063-2117 Elsevier.
  10. Bernard Fingleton, 2003. "Increasing returns: evidence from local wage rates in Great Britain," Oxford Economic Papers, Oxford University Press, vol. 55(4), pages 716-739, October.
  11. Douglas Staiger & James H. Stock, 1997. "Instrumental Variables Regression with Weak Instruments," Econometrica, Econometric Society, vol. 65(3), pages 557-586, May.
  12. Paul Krugman, 1998. "Space: The Final Frontier," Journal of Economic Perspectives, American Economic Association, vol. 12(2), pages 161-174, Spring.
  13. Peter Kennedy, 2003. "A Guide to Econometrics, 5th Edition," MIT Press Books, The MIT Press, edition 5, volume 1, number 026261183x, June.
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