Panel Data Inference Under Spatial Dependence

Center for Policy Research Working Paper No. 123

38 Pages Posted: 10 Apr 2011

See all articles by Badi H. Baltagi

Badi H. Baltagi

Syracuse University; CESifo (Center for Economic Studies and Ifo Institute); IZA Institute of Labor Economics

Alain Pirotte

ERMES (CNRS), Université Panthéon-Assas Paris II; INRETS-DEST

Date Written: March 1, 2010

Abstract

This paper focuses on inference based on the usual panel data estimators of a one-way error component regression model when the true specification is a spatial error component model. Among the estimators considered, are pooled OLS, random and fixed effects, maximum likelihood under normality, etc. The spatial effects capture the cross-section dependence, and the usual panel data estimators ignore this dependence. Two popular forms of spatial autocorrelation are considered, namely, spatial auto-regressive random effects (SAR-RE) and spatial moving average random effects (SMA-RE). We show that when the spatial coefficients are large, test of hypothesis based on the usual panel data estimators that ignore spatial dependence can lead to misleading inference.

Keywords: Panel data, Hausman test, Random effect, Spatial autocorrelation, Maximum likelihood

JEL Classification: C33

Suggested Citation

Baltagi, Badi H. and Pirotte, Alain, Panel Data Inference Under Spatial Dependence (March 1, 2010). Center for Policy Research Working Paper No. 123, Available at SSRN: https://ssrn.com/abstract=1805892 or http://dx.doi.org/10.2139/ssrn.1805892

Badi H. Baltagi (Contact Author)

Syracuse University ( email )

426 Eggers Hall
Syracuse, NY 13244-1020
United States
315-443-1630 (Phone)
315-443-1081 (Fax)

HOME PAGE: https://pbaltagi.wix.com/badibaltagi

CESifo (Center for Economic Studies and Ifo Institute) ( email )

Poschinger Str. 5
Munich, DE-81679
Germany

IZA Institute of Labor Economics

Schaumburg-Lippe-Str. 7 / 9
Bonn, D-53072
Germany

Alain Pirotte

ERMES (CNRS), Université Panthéon-Assas Paris II ( email )

12 Place du Panthéon
Paris, Cedex 5, 75005
France

INRETS-DEST

23 rue Alfred Nobel
Champs sur Marne, 77420
France

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
43
Abstract Views
564
PlumX Metrics