A Generalized Spatial Panel Data Model with Random Effects

70 Pages Posted: 13 Sep 2012

See all articles by Badi H. Baltagi

Badi H. Baltagi

Syracuse University - Maxwell School of Citizenship and Public Affairs; IZA Institute of Labor Economics; Syracuse University - Center for Policy Research

Peter H. Egger

Ifo Institute for Economic Research - International Trade and Foreign Direct Investment; Ludwig-Maximilians University of Munich; CESifo (Center for Economic Studies and Ifo Institute for Economic Research

Michael Pfaffermayr

University of Innsbruck - Department of Economics; Austrian Institute of Economic Research

Multiple version iconThere are 2 versions of this paper

Date Written: September 13, 2012

Abstract

This paper proposes 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 our generalized model to obtain the Anselin model, the Kapoor, Kelejian, and Prucha model, and 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.

Keywords: panel data, spatially autocorrelated residuals, maximum-likelihood estimation, Lagrange multiplier, likelihood ratio

JEL Classification: C230, C120

Suggested Citation

Baltagi, Badi H. and Egger, Peter H. and Pfaffermayr, Michael, A Generalized Spatial Panel Data Model with Random Effects (September 13, 2012). CESifo Working Paper Series No. 3930. Available at SSRN: https://ssrn.com/abstract=2145816

Badi H. Baltagi

Syracuse University - Maxwell School of Citizenship and Public Affairs ( email )

400 Eggers Hall
Syracuse, NY 13244
United States

IZA Institute of Labor Economics

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Syracuse University - Center for Policy Research ( email )

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HOME PAGE: http://www.maxwell.syr.edu/cpr_about.aspx?id=6442451316

Peter H. Egger (Contact Author)

Ifo Institute for Economic Research - International Trade and Foreign Direct Investment ( email )

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Ludwig-Maximilians University of Munich

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Germany

CESifo (Center for Economic Studies and Ifo Institute for Economic Research

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Munich, DE-81679
Germany

Michael Pfaffermayr

University of Innsbruck - Department of Economics ( email )

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Austria
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HOME PAGE: http://homepage.uibk.ac.at/~c43236/

Austrian Institute of Economic Research ( email )

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Austria
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HOME PAGE: http://www.wifo.ac.at/Michael.Pfaffermayr/

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