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Flexible dependence modeling using convex combinations of different types of connectivity structures

Author

Listed:
  • Nicolas Debarsy

    (LEM - Lille économie management - UMR 9221 - UA - Université d'Artois - UCL - Université catholique de Lille - ULCO - Université du Littoral Côte d'Opale - Université de Lille - CNRS - Centre National de la Recherche Scientifique)

  • James Lesage

    (McCoy College of Business Administration Finance and Economics Department - Texas State University)

Abstract

There is a great deal of literature regarding use of non-geographically based connectivity matrices or combinations of geographic and non-geographic structures in spatial econometrics models. We explore alternative approaches for constructing convex combinations of different types of dependence between observations. ? as well as ? use convex combinations of different connectivity matrices to form a single weight matrix that can be used in conventional spatial regression estimation and inference. An example for the case of two weight matrices, W 1 , W 2 reflecting different types of dependence between a cross-section of regions, firms, individuals etc., located in space would be: W c = γ 1 W 1 + (1 − γ 1)W 2 , 0 ≤ γ 1 ≤ 1. The matrix W c reflects a convex combination of the two weight matrices, with the scalar parameter γ 1 indicating the relative importance assigned to each type of dependence. We explore issues that arise in producing estimates and inferences from these more general cross-sectional regression relationships in a Bayesian framework. We propose two procedures to estimate such models and assess their finite sample properties through Monte Carlo experiments. We illustrate our methodology in an application to CEO salaries for a sample of nursing homes located in Texas. Two types of weights are considered, one reflecting spatial proximity of nursing homes and the other peer group proximity, which arises from the salary benchmarking literature.

Suggested Citation

  • Nicolas Debarsy & James Lesage, 2018. "Flexible dependence modeling using convex combinations of different types of connectivity structures," Post-Print halshs-03319303, HAL.
    • Handle: RePEc:hal:journl:halshs-03319303
    DOI: 10.1016/j.regsciurbeco.2018.01.001
    Note: View the original document on HAL open archive server: https://shs.hal.science/halshs-03319303v1
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    JEL classification:

    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
    • C21 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Cross-Sectional Models; Spatial Models; Treatment Effect Models
    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • M12 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration - - - Personnel Management; Executives; Executive Compensation
    • L84 - Industrial Organization - - Industry Studies: Services - - - Personal, Professional, and Business Services

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