Dynamic Spatial Panel Models: Networks, Common Shocks, and Sequential Exogeneity

41 Pages Posted: 31 Jul 2015

See all articles by Guido M. Kuersteiner

Guido M. Kuersteiner

Boston University - Department of Economics

Ingmar R. Prucha

University of Maryland; CESifo (Center for Economic Studies and Ifo Institute for Economic Research)

Date Written: July 30, 2015

Abstract

This paper considers a class of GMM estimators for general dynamic panel models, allowing for cross sectional dependence due to spatial lags and due to unspecified common shocks. We significantly expand the scope of the existing literature by allowing for endogenous spatial weight matrices, time-varying interactive effects, as well as weakly exogenous covariates. The model is expected to be useful for empirical work in both macro and microeconomics. An important area of application is in social interaction and network models where our specification can accommodate data dependent network formation. We discuss explicit examples from the recent social interaction literature. Identification of spatial interaction parameters is achieved through a combination of linear and quadratic moment conditions. We develop an orthogonal forward differencing transformation to aid in the estimation of factor components while maintaining orthogonality of moment conditions. This is an important ingredient to a tractable asymptotic distribution of our estimators. In the social interactions example, orthogonal forward differencing amounts to controlling for unobserved correlated effects by combining multiple outcome measures.

JEL Classification: C010, C210, C230, C310, C330

Suggested Citation

Kuersteiner, Guido and Prucha, Ingmar R., Dynamic Spatial Panel Models: Networks, Common Shocks, and Sequential Exogeneity (July 30, 2015). CESifo Working Paper Series No. 5445, Available at SSRN: https://ssrn.com/abstract=2637854 or http://dx.doi.org/10.2139/ssrn.2637854

Guido Kuersteiner

Boston University - Department of Economics ( email )

270 Bay State Road
Boston, MA 02215
United States

Ingmar R. Prucha (Contact Author)

University of Maryland ( email )

Department of Ecomics
College Park, MD 20742
United States
301-405-3499 (Phone)
301-405-3542 (Fax)

HOME PAGE: http://www.econ.umd.edu/~prucha/

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

Poschinger Str. 5
Munich, DE-81679
Germany

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