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Shrinkage Estimation of Network Spillovers with Factor Structured Errors

Ayden Higgins and Federico Martellosio

Papers from arXiv.org

Abstract: This paper explores the estimation of a panel data model with cross-sectional interaction that is flexible both in its approach to specifying the network of connections between cross-sectional units, and in controlling for unobserved heterogeneity. It is assumed that there are different sources of information available on a network, which can be represented in the form of multiple weights matrices. These matrices may reflect observed links, different measures of connectivity, groupings or other network structures, and the number of matrices may be increasing with sample size. A penalised quasi-maximum likelihood estimator is proposed which aims to alleviate the risk of network misspecification by shrinking the coefficients of irrelevant weights matrices to exactly zero. Moreover, controlling for unobserved factors in estimation provides a safeguard against the misspecification that might arise from unobserved heterogeneity. The estimator is shown to be consistent and selection consistent as both $n$ and $T$ tend to infinity, and its limiting distribution is characterised. Finite sample performance is assessed by means of a Monte Carlo simulation, and the method is applied to study the prevalence of network spillovers in determining growth rates across countries.

New Economics Papers: this item is included in nep-ecm, nep-net, nep-ore and nep-ure
Date: 2019-09
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