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RANDOM EFFECTS AND SPATIAL AUTOCORRELATION WITH EQUAL WEIGHTS

Published online by Cambridge University Press:  30 August 2006

Badi H. Baltagi
Badi H. Baltagi
Affiliation:
Syracuse University
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Abstract

This note considers a panel data regression model with spatial autoregressive disturbances and random effects where the weight matrix is normalized and has equal elements. This is motivated by Kelejian, Prucha, and Yuzefovich (2005, Journal of Regional Science, forthcoming), who argue that such a weighting matrix, having blocks of equal elements, might be considered when units are equally distant within certain neighborhoods but unrelated between neighborhoods. We derive a simple weighted least squares transformation that obtains generalized least squares (GLS) on this model as a simple ordinary least squares (OLS). For the special case of a spatial panel model with no random effects, we obtain two sufficient conditions where GLS on this model is equivalent to OLS. Finally, we show that these results, for the equal weight matrix, hold whether we use the spatial autoregressive specification, the spatial moving average specification, the spatial error components specification, or the Kapoor, Kelejian, and Prucha (2005, Journal of Econometrics, forthcoming) alternative to modeling panel data with spatially correlated error components.I thank Paolo Paruolo and an anonymous referee for helpful comments and suggestions.

Type
NOTES AND PROBLEMS
Information
Econometric Theory , Volume 22 , Issue 5 , October 2006 , pp. 973 - 984
Copyright
© 2006 Cambridge University Press

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