Abstract
This paper derives a joint Lagrange Multiplier (LM) test which simultaneously tests for the absence of spatial lag dependence and random individual effects in a panel data regression model. It turns out that this LM statistic is the sum of two standard LM statistics. The first one tests for the absence of spatial lag dependence ignoring the random individual effects, and the second one tests for the absence of random individual effects ignoring the spatial lag dependence. This paper also derives two conditional LM tests. The first one tests for the absence of random individual effects without ignoring the possible presence of spatial lag dependence. The second one tests for the absence of spatial lag dependence without ignoring the possible presence of random individual effects.
Highlights
Spatial models deal with correlation across spatial units usually in a cross-section setting, see Anselin (1988a)
This paper derives a joint Lagrange Multiplier (LM) test which simultaneously tests for the absence of spatial lag dependence and random individual e¤ects in a panel data regression model
It turns out that this LM statistic is the sum of two standard LM statistics
Summary
Spatial models deal with correlation across spatial units usually in a cross-section setting, see Anselin (1988a). This paper derives a joint LM test which simultaneously tests for the absence of spatial lag dependence and random individual e¤ects in a panel data regression model. The ...rst LM, tests for the absence of spatial lag dependence ignoring the random individual e¤ects This is the standard LM test derived in Anselin (1988b) for cross-section data. The second LM, tests for the absence of random individual e¤ects ignoring the spatial lag dependence This is the standard LM test derived in Breusch and Pagan (1980) for panel data. The second one tests for the absence of spatial lag dependence without ignoring the possible presence of random individual e¤ects This should provide useful diagnostics for applied researchers working in this area
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