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Reducing omitted-variable bias in spatial-interaction models by considering multiple neighbourhoods

Hugo Storm and Thomas Heckelei

Spatial Economic Analysis, 2018, vol. 13, issue 4, 457-472

Abstract: A major challenge in the analysis of micro-level spatial interaction is to distinguish actual interactions from the effects of spatially correlated omitted variables. We propose extending the simple spatially lagged explanatory (SLX) model to include two spatial weighting matrices at different spatial scales to reduce omitted-variable bias. The approach is suitable when actual interaction takes place on a smaller local level, while the omitted variables are spatially correlated at a larger regional level and correlated with the included characteristics. We provide an empirical motivation and use Monte Carlo simulation to illustrate the bias-reduction effects in certain settings.

Date: 2018
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DOI: 10.1080/17421772.2018.1468571

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