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Econometrics 2015, 3(4), 761-796; doi:10.3390/econometrics3040761

Testing in a Random Effects Panel Data Model with Spatially Correlated Error Components and Spatially Lagged Dependent Variables

1
Department of Economics, University of Washington, Seattle, WA 98195, USA
2
Department of Economics, Portland State University, Portland, OR 97201, USA
*
Author to whom correspondence should be addressed.
Academic Editor: Kerry Patterson
Received: 6 August 2015 / Revised: 18 October 2015 / Accepted: 26 October 2015 / Published: 9 November 2015
(This article belongs to the Special Issue Spatial Econometrics)
View Full-Text   |   Download PDF [466 KB, uploaded 9 November 2015]   |  

Abstract

We propose a random effects panel data model with both spatially correlated error components and spatially lagged dependent variables. We focus on diagnostic testing procedures and derive Lagrange multiplier (LM) test statistics for a variety of hypotheses within this model. We first construct the joint LM test for both the individual random effects and the two spatial effects (spatial error correlation and spatial lag dependence). We then provide LM tests for the individual random effects and for the two spatial effects separately. In addition, in order to guard against local model misspecification, we derive locally adjusted (robust) LM tests based on the Bera and Yoon principle (Bera and Yoon, 1993). We conduct a small Monte Carlo simulation to show the good finite sample performances of these LM test statistics and revisit the cigarette demand example in Baltagi and Levin (1992) to illustrate our testing procedures. View Full-Text
Keywords: individual random effects; spatial error correlation; spatial lag dependence; lagrange multiplier (LM) test; (robust) LM test individual random effects; spatial error correlation; spatial lag dependence; lagrange multiplier (LM) test; (robust) LM test
This is an open access article distributed under the Creative Commons Attribution License which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited. (CC BY 4.0).

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MDPI and ACS Style

He, M.; Lin, K.-P. Testing in a Random Effects Panel Data Model with Spatially Correlated Error Components and Spatially Lagged Dependent Variables. Econometrics 2015, 3, 761-796.

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