Estimation of a SAR model with endogenous spatial weights constructed by bilateral variables

Xi Qu, Lung-fei Lee and Chao Yang

Journal of Econometrics, 2021, vol. 221, issue 1, 180-197

Abstract: This paper studies the estimation of a cross-sectional spatial autoregressive (SAR) model with spatial weights constructed by bilateral variables like the trade or investment between regions. We model the possible endogeneity in spatial weights due to the correlation between the error term in the SAR model and unobserved interactive fixed effects in bilateral variables. Using a control function approach, we propose two-stage estimation methods and establish their consistency and asymptotic normality. Finite sample properties are investigated by a Monte Carlo study. We further apply our method to an empirical study of interactions among different US industries through production networks.

Keywords: Spatial autoregressive model; Endogenous spatial weight matrix; Bilateral variables (search for similar items in EconPapers)
JEL-codes: C31 C51 (search for similar items in EconPapers)
Date: 2021
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Citations: View citations in EconPapers (14)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:econom:v:221:y:2021:i:1:p:180-197

DOI: 10.1016/j.jeconom.2020.05.011

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