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Where is the Economics in Spatial Econometrics?

  • Luisa Corrado

    ()

    (Faculty of Economics, University of Cambridge)

  • Bernard Fingleton

    ()

    (Department of Economics, University of Strathclyde.)

Spatial econometrics has been criticized by some economists because some model specifications have been driven by data-analytic considerations rather than having a firm foundation in economic theory. In particular this applies to the so-called W matrix, which is integral to the structure of endogenous and exogenous spatial lags, and to spatial error processes, and which are almost the sine qua non of spatial econometrics. Moreover it has been suggested that the significance of a spatially lagged dependent variable involving W may be misleading, since it may be simply picking up the e¤ects of omitted spatially dependent variables, incorrectly suggesting the existence of a spillover mechanism. In this paper we review the theoretical and empirical rationale for network dependence and spatial externalities as embodied in spatially lagged variables, arguing that failing to acknowledge their presence at least leads to biased inference, can be a cause of inconsistent estimation, and leads to an incorrect understanding of true causal processes.

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Paper provided by University of Strathclyde Business School, Department of Economics in its series Working Papers with number 1101.

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Length: 35 pages
Date of creation: Jan 2011
Date of revision:
Handle: RePEc:str:wpaper:1101
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