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A Generalized Spatial Panel Data Model with Random Effects

This paper prooses 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, Kelejian, and Prucha (2007). Our encompassing specification allows us to test for these models as restricted specifications. In particular, we derive three LM and LR tests that restrict out 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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Paper provided by Center for Policy Research, Maxwell School, Syracuse University in its series Center for Policy Research Working Papers with number 113.

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Length: 43 pages
Date of creation: Feb 2009
Date of revision:
Handle: RePEc:max:cprwps:113
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  1. 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.
  2. Pesaran, M.H. & Tosetti, E., 2007. "Large Panels with Common Factors and Spatial Correlations," Cambridge Working Papers in Economics 0743, Faculty of Economics, University of Cambridge.
  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. Sarafidis, Vasilis & Wansbeek, Tom, 2010. "Cross-sectional Dependence in Panel Data Analysis," MPRA Paper 20367, University Library of Munich, Germany.
  5. Alexander Chudik & M. Hashem Pesaran & Elisa Tosetti, 2011. "Weak and strong cross‐section dependence and estimation of large panels," Econometrics Journal, Royal Economic Society, vol. 14, pages C45-C90, 02.
  6. Zhenlin Yang, 2009. "A Robust LM Test for Spatial Error Components," Development Economics Working Papers 22488, East Asian Bureau of Economic Research.
  7. 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.
  8. 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.
  9. 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.
  10. 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.
  11. repec:cup:cbooks:9780521537469 is not listed on IDEAS
  12. 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.
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