Abstract
AbstractWe investigate the common conjecture in applied econometric work that the inclusion of spatial fixed effects in a regression specification for a single cross‐sectional data set removes spatial dependence. We demonstrate analytically and by means of a series of simulation experiments how evidence of the removal of spatial autocorrelation by spatial fixed effects may be spurious when the true data generating processes (DGP) takes the form of a spatial lag or spatial error dependence. In addition, we also show that spatial fixed effects correctly remove spatial correlation only in the special case where the dependence is group‐wise, with all observations in the same group as neighbours of each other.
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