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Baltagi study on spatial panel data with random effects published in Econometric Reviews

Jan 31, 2013

A Generalized Spatial Panel Data Model with Random Effects

Badi H. Baltagi, Peter Egger & Michael Pfaffermayr

Econometric Reviews, January 2013

Badi H. Baltagi

Badi H. Baltagi

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 et al. (2007). The authors' encompassing specification allows us to test for these models as restricted specifications. In particular, they derive three Lagrange multiplier (LM) and likelihood ration (LR) tests that restrict their generalized model to obtain (i) the Anselin model, (ii) the Kapoor, Kelejian, and Prucha model, and (iii) the simple random effects model that ignores the spatial correlation in the residuals. For two of these three tests, the authors obtain closed form solutions and they derive their large sample distributions. Their Monte Carlo results show that the suggested tests are powerful in testing for these restricted specifications even in small and medium sized samples.