Dynamic Panel Data Models Featuring Endogenous Interaction and Spatially Correlated Errors

CentER Discussion Paper Series No. 2009-92

37 Pages Posted: 8 Dec 2009

See all articles by Jan P. A. M. Jacobs

Jan P. A. M. Jacobs

University of Groningen - Faculty of Economics and Business

Jenny E. Ligthart

Tilburg University - CentER, Department of Economics; University of Groningen - Faculty of Economics and Business; CESifo (Center for Economic Studies and Ifo Institute)

Hendrik Vrijburg

Erasmus University Rotterdam (EUR)

Date Written: October 31, 2009

Abstract

We extend the three-step generalized methods of moments (GMM) approach of Kapoor, Kelejian, and Prucha (2007), which corrects for spatially correlated errors in static panel data models, by introducing a spatial lag and a one-period lag of the dependent variable as additional explanatory variables. Combining the extended Kapoor, Kelejian, and Prucha (2007) approach with the dynamic panel data model GMM estimators of Arellano and Bond (1991) and Blundell and Bond (1998) and supplementing the dynamic instruments by lagged and weighted exogenous variables as suggested by Kelejian and Robinson (1993) yields new spatial dynamic panel data estimators. The performance of these spatial dynamic panel data estimators is investigated by means of Monte Carlo simulations. We show that differences in bias as well as root mean squared error between spatial GMM estimates and corresponding GMM estimates in which spatial error correlation is ignored are small.

Keywords: Dynamic panel models, spatial lag, spatial error, GMM estimation

JEL Classification: C15, C21, C22, C23

Suggested Citation

Jacobs, Jan P.A.M. and Ligthart, Jenny E. and Vrijburg, Hendrik, Dynamic Panel Data Models Featuring Endogenous Interaction and Spatially Correlated Errors (October 31, 2009). CentER Discussion Paper Series No. 2009-92. Available at SSRN: https://ssrn.com/abstract=1517257 or http://dx.doi.org/10.2139/ssrn.1517257

Jan P.A.M. Jacobs

University of Groningen - Faculty of Economics and Business ( email )

Postbus 72
9700 AB Groningen
Netherlands

Jenny E. Ligthart (Contact Author)

Tilburg University - CentER, Department of Economics ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands
+31 13 466 8755 (Phone)
+31 13 466 4032 (Fax)

University of Groningen - Faculty of Economics and Business ( email )

Postbus 72
9700 AB Groningen
Netherlands

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

Hendrik Vrijburg

Erasmus University Rotterdam (EUR) ( email )

Burgemeester Oudlaan 50
3000 DR Rotterdam, Zuid-Holland 3062PA
Netherlands

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