m.m. fischer and a. berlin, springer. cal yardstick rbin ...€¦ · seminar is based on three...

47
J.Paul Elhorst, University of Groningen, the Netherlands Seminar, St. Andrews, January 18, 2010 - What are spatial interaction effects and what is a spatial econometric model? - How to estimate a spatial econometric model? - A theoretical model that is tested using a spatial econometric model. Seminar is based on three recent papers: - J.P.Elhorst (2009) Spatial Panel Data Models. In: M.M. Fischer and A. Getis (eds.), Handbook of Applied Spatial Analysis. Berlin, Springer. - Elhorst J.P., Fréret S. (2009) Evidence of Political Yardstick Competition in France Using a Two-regime Spatial Durbin Model with Fixed Effects. Journal of Regional Science 49: 931-951. - J.P.Elhorst (2010) Applied Spatial Econometrics: Raising the Bar. Spatial Economic Analysis, Forthcoming. see www.regroningen.nl/elhorst (spatial econometrics)

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Page 1: M.M. Fischer and A. Berlin, Springer. cal Yardstick rbin ...€¦ · Seminar is based on three recent papers: - J.P.Elhorst (2009) Spatial Panel Data Models. In: M.M. Fischer and

J.P

aul

Elh

ors

t, U

niv

ersi

ty o

f G

ron

ing

en, th

e N

eth

erla

nd

s

Sem

inar

, S

t. A

nd

rew

s, J

anu

ary

18

, 2

010

- W

hat

are

sp

atia

l in

tera

ctio

n e

ffec

ts a

nd

wh

at i

s a

spat

ial

eco

no

met

ric

mo

del

?

- H

ow

to

est

imat

e a

spat

ial

eco

no

met

ric

mo

del

?

- A

th

eore

tica

l m

od

el t

hat

is

test

ed u

sin

g a

sp

atia

l ec

on

om

etri

c m

od

el.

Sem

inar

is

bas

ed o

n t

hre

e re

cen

t p

aper

s:

- J.

P.E

lho

rst

(20

09

) S

pat

ial

Pan

el D

ata

Mo

del

s. I

n:

M.M

. F

isch

er a

nd

A.

Get

is (

eds.

), H

and

bo

ok

of

Ap

pli

ed S

pat

ial

An

aly

sis.

Ber

lin

, S

pri

ng

er.

- E

lho

rst

J.P

.,

Fré

ret

S.

(20

09

) E

vid

ence

o

f P

oli

tica

l Y

ard

stic

k

Co

mp

etit

ion

in

Fra

nce

Usi

ng

a T

wo

-reg

ime

Sp

atia

l D

urb

in M

od

el w

ith

Fix

ed E

ffec

ts.

Jou

rna

l of

Reg

ion

al

Sci

ence

49

: 9

31

-951

.

- J.

P.E

lho

rst

(20

10

) A

pp

lied

Sp

atia

l E

con

om

etri

cs:

Rai

sin

g t

he

Bar

.

Sp

atia

l E

con

om

ic A

nal

ysi

s, F

ort

hco

min

g.

see

ww

w.r

egro

nin

gen

.nl/

elh

ors

t (s

pat

ial

eco

no

met

rics

)

Page 2: M.M. Fischer and A. Berlin, Springer. cal Yardstick rbin ...€¦ · Seminar is based on three recent papers: - J.P.Elhorst (2009) Spatial Panel Data Models. In: M.M. Fischer and

J.P

.Elh

ors

t (2

01

0)

Appli

ed S

pat

ial

Eco

no

met

rics

: R

aisi

ng t

he

Bar

. S

pat

ial

Eco

no

mic

An

aly

sis,

Fo

rth

com

ing.

Th

e id

ea th

at cr

oss

-sec

tio

nal

unit

s in

tera

ct w

ith

oth

ers

has

rece

ntl

y r

ecei

ved

co

nsi

der

able

att

enti

on

, as

ev

iden

ced

in

th

e

dev

elop

men

t o

f th

eore

tica

l fr

amew

ork

s to

ex

pla

in

soci

al

ph

eno

men

a su

ch

as

soci

al

no

rms,

p

eer

infl

uen

ce,

nei

gh

bo

rhoo

d e

ffec

ts,

net

wo

rk e

ffec

ts,

con

tag

ion

, ep

idem

ics,

soci

al i

nte

ract

ion

s, i

nte

rdep

end

ent

pre

fere

nce

s, e

tc.

Inte

ract

ion

effe

ct

=

the

aver

age

beh

avio

r in

so

me

gro

up

infl

uen

ces

the

beh

avio

r o

f th

e in

div

idu

als

that

co

mp

rise

th

e

gro

up

(M

ansk

i, 1

993

).

Page 3: M.M. Fischer and A. Berlin, Springer. cal Yardstick rbin ...€¦ · Seminar is based on three recent papers: - J.P.Elhorst (2009) Spatial Panel Data Models. In: M.M. Fischer and

uW

XX

WY

YN

+αι

= V

ecto

r N

ota

tion

ε+

λ=

Wu

u C

ross

-sec

tio

n d

ata

Y den

ote

s an

N

×1 vec

tor

consi

stin

g of

one

ob

serv

atio

n on th

e

dep

enden

t var

iable

for

ever

y u

nit

in t

he

sam

ple

(i=

1,…

,N),

Nι i

s an

N×1

vec

tor

of

ones

ass

oci

ated

wit

h t

he

const

ant

term

par

amet

er α

,

X den

ote

s an

N

×K

m

atri

x of

exogen

ous

exp

lanat

ory

var

iab

les,

wit

h t

he

asso

ciat

ed p

aram

eter

s β

conta

ined

in a

1 v

ecto

r, a

nd

T

N1

),.

..,

ε=ε

is

a

vec

tor

of

dis

turb

ance

te

rms,

w

her

e ε i

ar

e

indep

enden

tly a

nd i

den

tica

lly d

istr

ibute

d e

rror

term

s fo

r al

l i

wit

h

zero

mea

n a

nd v

aria

nce

σ2.

S

pac

e-ti

me

dat

a: A

dd s

ub

scri

pt

t to

Y, X

, u a

nd ε

.

Page 4: M.M. Fischer and A. Berlin, Springer. cal Yardstick rbin ...€¦ · Seminar is based on three recent papers: - J.P.Elhorst (2009) Spatial Panel Data Models. In: M.M. Fischer and

En

do

gen

ou

s in

tera

ctio

n e

ffec

ts (

WY

) =

th

e p

rop

ensi

ty o

f

an

ind

ivid

ual

to

b

ehav

e in

so

me

way

v

arie

s w

ith

th

e

beh

avio

r of

the

gro

up

.

Co

nsi

der

th

e ch

oic

e o

f h

igh

sch

oo

l af

ter

pri

mar

y s

cho

ol:

the

ind

ivid

ual

ch

oic

e te

nd

s to

var

y w

ith

th

e ch

oic

e m

ade

by

fri

end

s.

Page 5: M.M. Fischer and A. Berlin, Springer. cal Yardstick rbin ...€¦ · Seminar is based on three recent papers: - J.P.Elhorst (2009) Spatial Panel Data Models. In: M.M. Fischer and

Ex

og

eno

us

inte

ract

ion

eff

ects

(W

X)

= t

he

pro

pen

sity

of

an

ind

ivid

ual

to

b

ehav

e in

so

me

way

v

arie

s w

ith

th

e

exo

gen

ou

s ch

arac

teri

stic

s o

f th

e g

rou

p (

mo

stly

th

ere

are

K

exo

gen

ou

s ex

pla

nat

ory

v

aria

ble

s,

and

th

us

K

exo

gen

ou

s in

tera

ctio

n e

ffec

ts).

Th

ere

are

exo

gen

ous

effe

cts

if sc

ho

ol

cho

ice

ten

ds

to

var

y w

ith

th

e ex

og

eno

us

char

acte

rist

ics

of

oth

er p

eop

le,

e.g

. th

e o

pin

ion

of

the

par

ents

of

frie

nd

s.

Page 6: M.M. Fischer and A. Berlin, Springer. cal Yardstick rbin ...€¦ · Seminar is based on three recent papers: - J.P.Elhorst (2009) Spatial Panel Data Models. In: M.M. Fischer and

Co

rrel

ated

eff

ects

(d

istu

rban

ce t

erm

Wu

) =

in

div

idual

s in

the

sam

e g

roup

te

nd

to

b

ehav

e si

mil

arly

b

ecau

se th

ey

hav

e si

mil

ar

ind

ivid

ual

ch

arac

teri

stic

s o

r fa

ce

sim

ilar

inst

itu

tio

nal

en

vir

on

men

ts (

thes

e m

ay b

e u

no

bse

rved

).

Th

ere

are

corr

elat

ed e

ffec

ts i

f ch

ild

ren m

ake

the

sam

e

cho

ice

bec

ause

th

ey

hav

e si

mil

ar

bac

kg

rou

nds

(nei

gh

bo

urh

ood

) or

bec

ause

th

ey a

re t

aug

ht

by

th

e sa

me

teac

her

s.

Page 7: M.M. Fischer and A. Berlin, Springer. cal Yardstick rbin ...€¦ · Seminar is based on three recent papers: - J.P.Elhorst (2009) Spatial Panel Data Models. In: M.M. Fischer and

The

rela

tionsh

ips

bet

wee

n d

iffe

rent

spat

ial

dep

enden

ce m

odel

s fo

r cr

oss

-sec

tion d

ata

λ

=0

θ=

0 ρ

=0

ρ=

0

θ

=0

λ=

0

θ=

-ρβ

ρ=

0 λ=

0

θ=

0

Up t

o 2

007

sp

atia

l ec

on

om

etri

cian

s w

ere

mai

nly

in

tere

sted

in

mo

del

s co

nta

inin

g

on

e ty

pe

of

spat

ial

inte

ract

ion

eff

ect:

the

spat

ial

lag m

odel

and t

he

spat

ial

erro

r

model

.

Man

ski

model

ε+

λ=

+αι

=

Wu

u

uW

XX

WY

YN

Kel

ejia

n-P

ruch

a m

odel

ε+

λ=

+αι

=

Wu

u

uX

WY

YN

Spat

ial

Durb

in m

odel

ε

+αι

=W

XX

WY

YN

Spat

ial

Durb

in e

rror

mod

el

ε+

λ=

+αι

=

Wu

u

uW

XX

YN

Spat

ial

lag m

odel

ε+

β+

αι

=X

WY

YN

Spat

ial

erro

r m

odel

u

XY

N+

β+

αι

=

ε+

λ=

Wu

u

(if

θ=

-ρβ

then

λ=

ρ)

OL

S m

odel

ε+

β+

αι

=X

YN

Page 8: M.M. Fischer and A. Berlin, Springer. cal Yardstick rbin ...€¦ · Seminar is based on three recent papers: - J.P.Elhorst (2009) Spatial Panel Data Models. In: M.M. Fischer and

Iden

tifi

cati

on p

rob

lem

: O

ne

of

the

K+

2 i

nte

ract

ion

eff

ect

sho

uld

be

dro

pp

ed. F

oll

ow

ing

LeS

age

and

Pac

e (p

p. 15

5-

15

8),

th

e b

est

op

tio

n i

s to

ex

clu

de

the

spat

iall

y

auto

corr

elat

ed e

rro

r te

rm.

Th

e co

st o

f ig

no

rin

g s

pat

ial

dep

end

ence

in

th

e d

epen

den

t v

aria

ble

an

d/o

r in

th

e

ind

epen

den

t v

aria

ble

s is

rel

ativ

ely

hig

h s

ince

th

e

eco

no

met

rics

lit

erat

ure

has

po

inte

d o

ut

that

if

on

e o

r

mo

re r

elev

ant

exp

lan

ato

ry v

aria

ble

are

om

itte

d f

rom

a

reg

ress

ion

eq

uat

ion

, th

e es

tim

ato

r o

f th

e co

effi

cien

ts f

or

the

rem

ain

ing

var

iab

les

is b

iase

d a

nd

in

con

sist

ent

(Gre

ene

20

05

, p

p. 13

3-1

34

). I

n c

on

tras

t, i

gn

ori

ng

sp

atia

l

dep

end

ence

in

th

e d

istu

rban

ces,

if

pre

sen

t, w

ill

only

cau

se a

lo

ss o

f ef

fici

ency

.

*

*

Page 9: M.M. Fischer and A. Berlin, Springer. cal Yardstick rbin ...€¦ · Seminar is based on three recent papers: - J.P.Elhorst (2009) Spatial Panel Data Models. In: M.M. Fischer and

W i

s an

N m

atri

x d

escr

ibin

g t

he

spat

ial

arra

ng

emen

t o

f th

e sp

atia

l

un

its

in t

he

sam

ple

. L

ee (

20

04

) sh

ow

s th

at W

sh

ou

ld b

e a

no

nn

egat

ive

mat

rix

of

kn

ow

n c

on

stan

ts.

Th

e d

iag

on

al e

lem

ents

are

set

to

zer

o b

y

assu

mp

tio

n,

sin

ce n

o s

pat

ial

un

it c

an b

e v

iew

ed a

s it

s o

wn

nei

gh

bou

r.

Th

e m

atri

ces

I-ρW

an

d I

-λW

sh

ou

ld b

e n

on

-sin

gu

lar,

wh

ere

I re

pre

sen

ts

the

iden

tity

mat

rix

of

ord

er N

. F

or

a sy

mm

etri

c W

, th

is c

on

dit

ion

is

sati

sfie

d a

s lo

ng

as

ρ a

nd

λ a

re i

n t

he

inte

rio

r o

f (1

/ωm

in,1

/ωm

ax),

wher

e

ωm

in d

enote

s th

e sm

alle

st (

i.e.

, m

ost

neg

ativ

e) a

nd ω

max

the

larg

est

real

char

acte

rist

ic r

oot

of

W. If

W i

s ro

w-n

orm

aliz

ed s

ubse

quen

tly, th

e la

tter

inte

rval

tak

es t

he

form

(1/ω

min

,1),

sin

ce t

he

larg

est

char

acte

rist

ic r

oo

t o

f

W e

qu

als

un

ity

in

th

is s

itu

atio

n.

If W

is

an a

sym

met

ric

mat

rix

bef

ore

it

is

row

-no

rmal

ized

, it

may

hav

e co

mp

lex

char

acte

rist

ic r

oots

. L

eSag

e an

d

Pac

e (p

p. 88-8

9)

dem

onst

rate

that

in

th

at c

ase

ρ a

nd

λ a

re r

estr

icte

d t

o t

he

inte

rval

(1/r

min

,1),

wher

e r m

in e

qual

s th

e m

ost

neg

ativ

e pure

ly r

eal

char

acte

rist

ic r

oot

of

W a

fter

this

mat

rix i

s ro

w-n

orm

aliz

ed.

Page 10: M.M. Fischer and A. Berlin, Springer. cal Yardstick rbin ...€¦ · Seminar is based on three recent papers: - J.P.Elhorst (2009) Spatial Panel Data Models. In: M.M. Fischer and

1

2

3

Ro

w-n

orm

aliz

ing

01

0

10

1

01

0

giv

es W

=

01

0

2/1

02/

1

01

0

.

Page 11: M.M. Fischer and A. Berlin, Springer. cal Yardstick rbin ...€¦ · Seminar is based on three recent papers: - J.P.Elhorst (2009) Spatial Panel Data Models. In: M.M. Fischer and

Fin

ally

, one

of

the

foll

ow

ing t

wo c

ondit

ions

should

be

sati

sfie

d:

(a)

the

row

and c

olu

mn s

um

s of

the

mat

rice

s W

, (I

-ρW

)-1 a

nd

(I-λ

W)-1

bef

ore

W i

s ro

w-n

orm

aliz

ed s

hould

be

unif

orm

ly b

ounded

in a

bso

lute

val

ue

as N

goes

to i

nfi

nit

y, or

(b)

the

row

and c

olu

mn s

um

s of

W b

efore

W i

s ro

w-n

orm

aliz

ed

should

not

div

erge

to i

nfi

nit

y a

t a

rate

equal

to o

r fa

ster

than

the

rate

of

the

sam

ple

siz

e N

.

Condit

ion (

a) i

s ori

gin

ated

by K

elej

ian a

nd P

ruch

a (1

998, 1999),

and c

ondit

ion (

b)

by L

ee (

2004).

Both

condit

ions

lim

it t

he

cross

-

sect

ional

corr

elat

ion t

o a

man

agea

ble

deg

ree,

i.e

., t

he

corr

elat

ion

bet

wee

n t

wo s

pat

ial

unit

s sh

ould

conver

ge

to z

ero a

s th

e dis

tance

sep

arat

ing t

hem

incr

ease

s to

infi

nit

y.

Page 12: M.M. Fischer and A. Berlin, Springer. cal Yardstick rbin ...€¦ · Seminar is based on three recent papers: - J.P.Elhorst (2009) Spatial Panel Data Models. In: M.M. Fischer and

When

the

spat

ial

wei

ghts

mat

rix i

s a

bin

ary c

onti

guit

y m

atri

x,

(a)

is

sati

sfie

d.

Norm

ally

, no s

pat

ial

unit

is

assu

med

to b

e a

nei

ghbour

to

more

than

a g

iven

num

ber

, sa

y q

, of

oth

er u

nit

s.

Page 13: M.M. Fischer and A. Berlin, Springer. cal Yardstick rbin ...€¦ · Seminar is based on three recent papers: - J.P.Elhorst (2009) Spatial Panel Data Models. In: M.M. Fischer and

By c

ontr

ast,

when

the

spat

ial

wei

ghts

mat

rix i

s an

inver

se d

ista

nce

mat

rix,

(a)

may

not

be

sati

sfie

d.

Consi

der

an i

nfi

nit

e num

ber

of

spat

ial

unit

s th

at a

re l

inea

rly a

rran

ged

. T

he

dis

tance

of

each

sp

atia

l

unit

to i

ts f

irst

lef

t- a

nd r

ight-

han

d n

eighb

our

is d

; to

its

sec

ond

left

- an

d r

ight-

han

d n

eighb

our,

the

dis

tance

is

2d;

and s

o o

n.

When

W i

s an

inver

se d

ista

nce

mat

rix a

nd t

he

off

-dia

gonal

ele

men

ts o

f

W ar

e of

the

form

1/d

ij,

wher

e d

ij is

th

e dis

tance

b

etw

een tw

o

spat

ial

unit

s i

and

j,

each

ro

w

sum

is

...)

(2

d3

1d

21

d1

++

,

rep

rese

nti

ng a

ser

ies

that

is

not

finit

e. T

his

is

per

hap

s th

e re

ason

why s

om

e em

pir

ical

appli

cati

ons

intr

oduce

a c

ut-

off

poin

t d* s

uch

that

w

ij=

0

if

dij>

d*.

Ho

wev

er,

since

th

e ra

tio

...)

(2

d3

1d

21

d1

++

/N→

0 as

N

goes

to

in

finit

y,

condit

ion (b

) is

sati

sfie

d,

whic

h i

mp

lies

that

an i

nver

se d

ista

nce

mat

rix w

ithout

a

cut-

off

p

oin

t does

not

nec

essa

rily

hav

e to

b

e ex

cluded

in

an

emp

iric

al s

tudy f

or

reas

ons

of

consi

sten

cy.

Page 14: M.M. Fischer and A. Berlin, Springer. cal Yardstick rbin ...€¦ · Seminar is based on three recent papers: - J.P.Elhorst (2009) Spatial Panel Data Models. In: M.M. Fischer and

T

he

opp

osi

te s

ituat

ion o

ccurs

when

all

cro

ss-s

ecti

onal

unit

s ar

e

assu

med

to b

e nei

ghb

ours

of

each

oth

er a

nd a

re g

iven

equal

wei

ghts

. In

that

cas

e al

l off

-dia

gonal

ele

men

ts o

f th

e sp

atia

l

wei

ghts

mat

rix a

re w

ij=

1. S

ince

the

row

and c

olu

mn s

um

s ar

e N

-1,

thes

e su

ms

div

erge

to i

nfi

nit

y a

s N

goes

to i

nfi

nit

y. In

contr

ast

to

the

pre

vio

us

case

, how

ever

, (N

-1)/

N→

1 i

nst

ead o

f 0 a

s N

go

es t

o

infi

nit

y. T

his

im

pli

es t

hat

a s

pat

ial

wei

ghts

mat

rix t

hat

has

equal

wei

ghts

and t

hat

is

row

-norm

aliz

ed s

ub

sequen

tly, w

ij=

1/(

N-1

),

must

be

excl

uded

for

reas

ons

of

consi

sten

cy.

No

te:

som

e o

f th

e re

gula

rity

co

nd

itio

ns

may

ch

ang

e in

a p

anel

dat

a se

ttin

g (

Yu

et

al.

2007

).

*

*

Page 15: M.M. Fischer and A. Berlin, Springer. cal Yardstick rbin ...€¦ · Seminar is based on three recent papers: - J.P.Elhorst (2009) Spatial Panel Data Models. In: M.M. Fischer and

J.P

.Elh

ors

t (2

009)

Sp

atia

l P

anel

Dat

a M

odel

s. I

n:

M.M

. F

isch

er

and A

. G

etis

(ed

s.),

Han

db

ook o

f A

pp

lied

Sp

atia

l A

nal

ysi

s. B

erli

n,

Sp

ringer

.

In r

ecen

t yea

rs,

the

spat

ial

econom

etri

cs l

iter

ature

has

exhib

ited

a

gro

win

g i

nte

rest

in t

he

spec

ific

atio

n a

nd e

stim

atio

n o

f ec

onom

etri

c

rela

tionsh

ips

bas

ed o

n s

pat

ial

pan

els.

Sp

atia

l pan

els

typic

ally

ref

er

to d

ata

conta

inin

g t

ime

seri

es o

bse

rvat

ions

of

a nu

mb

er o

f sp

atia

l

unit

s (z

ip

codes

, m

un

icip

alit

ies,

re

gio

ns,

st

ates

, ju

risd

icti

ons,

countr

ies,

etc

.). T

his

inte

rest

can

be

exp

lain

ed b

y t

he

fact

that

pan

el

dat

a off

er r

esea

rcher

s ex

tended

mod

elin

g p

oss

ibil

itie

s as

com

par

ed

to

the

single

eq

uat

ion

cross

-sec

tional

se

ttin

g,

whic

h

was

th

e

pri

mar

y f

ocu

s of

the

spat

ial

econom

etri

cs l

iter

ature

for

a lo

ng t

ime.

Page 16: M.M. Fischer and A. Berlin, Springer. cal Yardstick rbin ...€¦ · Seminar is based on three recent papers: - J.P.Elhorst (2009) Spatial Panel Data Models. In: M.M. Fischer and

Sp

atia

l la

g m

odel

(E

ndogen

ous

inte

ract

ion e

ffec

ts o

nly

)

xy

wy

iti

it

N

1j

jtij

itε

+∑

==

δ

is

call

ed

the

spat

ial

auto

regre

ssiv

e co

effi

cien

t an

d

wij

is

an

elem

ent

of

a sp

atia

l w

eights

m

atri

x

W

des

crib

ing

the

spat

ial

arra

ngem

ent

of

the

unit

s in

the

sam

ple

.

Note

: In

this

pap

er,

I do n

ot

use

the

vec

tor

form

nota

tion,

but

a

nota

tion i

n i

ndiv

idual

obse

rvat

ions.

Furt

her

more

, I

use

δ i

nst

ead o

f

ρ

as

the

coef

fici

ent

of

endogen

ous

inte

ract

ion

effe

cts

(WY

).

Fin

ally

, ex

ogen

ous

inte

ract

ion e

ffec

ts c

an b

e in

cluded

by r

epla

cing

xit b

y

∑=

=N

1j

jtij

itit

]x

wx[

x (

spat

ial

Durb

in m

odel

).

Page 17: M.M. Fischer and A. Berlin, Springer. cal Yardstick rbin ...€¦ · Seminar is based on three recent papers: - J.P.Elhorst (2009) Spatial Panel Data Models. In: M.M. Fischer and

Rea

son t

o c

onsi

der

fix

ed e

ffec

ts/r

ando

m e

ffec

ts m

odel

s.

The

stan

dar

d r

easo

nin

g b

ehin

d s

pat

ial

spec

ific

eff

ects

is

that

they

contr

ol

for

all

spac

e-sp

ecif

ic

tim

e-in

var

iant

var

iab

les

whose

om

issi

on c

ould

bia

s th

e es

tim

ates

in a

typ

ical

cro

ss-s

ecti

onal

stu

dy

(Bal

tagi,

2005).

The

spat

ial

spec

ific

eff

ects

may

be

trea

ted a

s fi

xed

eff

ects

or

as

random

eff

ects

. In

the

fixed

eff

ects

model

, a

du

mm

y v

aria

ble

is

intr

oduce

d f

or

each

sp

atia

l unit

, w

hil

e in

the

rando

m e

ffec

ts m

odel

,

µi

is

trea

ted

as

a ra

ndo

m

var

iab

le

that

is

in

dep

enden

tly

and

iden

tica

lly

dis

trib

ute

d

wit

h

zero

m

ean

an

d

var

iance

σ

µ.

Furt

her

more

, it

is

assu

med

that

the

random

var

iab

les

µi an

d ε

it a

re

indep

enden

t of

each

oth

er.

Page 18: M.M. Fischer and A. Berlin, Springer. cal Yardstick rbin ...€¦ · Seminar is based on three recent papers: - J.P.Elhorst (2009) Spatial Panel Data Models. In: M.M. Fischer and

I fi

rst

consi

der

the

fixed

eff

ects

mod

el a

nd a

ssum

e th

at t

he

dat

a ar

e

sort

ed f

irst

by t

ime

and

then

by s

pat

ial

unit

s, w

her

eas

the

clas

sic

pan

el d

ata

lite

ratu

re t

ends

to s

ort

the

dat

a fi

rst

by s

pat

ial

unit

s an

d

then

by t

ime.

A

ccord

ing t

o A

nse

lin e

t al

. (2

006),

the

exte

nsi

on o

f th

e fi

xed

effe

cts

mod

el w

ith a

sp

atia

lly l

agged

dep

enden

t var

iable

rai

ses

two

com

pli

cati

ons.

F

irst

, th

e en

dogen

eity

of

Σjw

ijy

jt

vio

late

s th

e

assu

mp

tion o

f th

e st

andar

d r

egre

ssio

n m

odel

that

E[(

Σjw

ijy

jt)ε

it]=

0.

In

model

es

tim

atio

n,

this

si

mult

anei

ty

must

b

e ac

counte

d

for.

Sec

ond,

the

spat

ial

dep

enden

ce am

ong th

e obse

rvat

ions

at ea

ch

poin

t in

tim

e m

ay a

ffec

t th

e es

tim

atio

n o

f th

e fi

xed

eff

ects

.

Page 19: M.M. Fischer and A. Berlin, Springer. cal Yardstick rbin ...€¦ · Seminar is based on three recent papers: - J.P.Elhorst (2009) Spatial Panel Data Models. In: M.M. Fischer and

The

log-l

ikel

ihood fu

nct

ion of

the

spat

ial

lag m

odel

w

ith fi

xed

effe

cts

is

∑∑

µ−

−∑δ

−σ

−δ

−+

πσ−

==

==

N

1i

T

1t

2

iit

N

1j

jtij

it2

N

2,

xy

wy(

2

1|

WI|

log

T)

2lo

g(

2NT

LogL

-

----

----

----

--

wher

e th

e se

cond

term

on

the

right-

han

d

side

repre

sents

th

e

Jaco

bia

n t

erm

of

the

tran

sform

atio

n f

rom

ε t

o y

tak

ing i

nto

acc

ount

the

endogen

eity

of

Σjw

ijy

jt (

Anse

lin 1

988, p

. 63).

Co

mp

uta

tional

pro

ble

ms

of

the

Jaco

bia

n t

erm

.

Page 20: M.M. Fischer and A. Berlin, Springer. cal Yardstick rbin ...€¦ · Seminar is based on three recent papers: - J.P.Elhorst (2009) Spatial Panel Data Models. In: M.M. Fischer and

∑∑

µ−

−∑δ

−σ

−δ

−+

πσ−

==

==

N

1i

T

1t

2

iit

N

1j

jtij

it2

N

2,

xy

wy(

2

1|

WI|

log

T)

2lo

g(

2NT

LogL

The

par

tial

der

ivat

ives

of

the

log-l

ikel

ihood w

ith r

esp

ect

to µ

i are

0)

βx

yw

y(1

LogL

T

1t

iit

N

1j

jtij

it2

i

=∑

µ−

−∑δ

−σ

=µ∂

∂=

=, i=

1,…

,N.

When

solv

ing f

or

µi ,

one

ob

tain

s

∑−

∑δ

−=

µ=

=

T

1t

it

N

1j

jtij

iti

xy

wy(

T1, i=

1,…

,N.

Page 21: M.M. Fischer and A. Berlin, Springer. cal Yardstick rbin ...€¦ · Seminar is based on three recent papers: - J.P.Elhorst (2009) Spatial Panel Data Models. In: M.M. Fischer and

∑−

∑δ

−=

µ=

=

T

1t

it

N

1j

jtij

iti

xy

wy(

T1, i=

1,…

,N.

This

equat

ion s

how

s th

at t

he

stan

dar

d f

orm

ula

for

calc

ula

ting t

he

spat

ial

fixed

eff

ects

app

lies

to t

he

fixed

eff

ects

spat

ial

lag m

odel

in

a st

raig

htf

orw

ard m

anner

. C

orr

ecti

ons

for

the

spat

ial

dep

enden

ce

among

the

ob

serv

atio

ns

at

each

poin

t in

ti

me,

oth

er

than

th

e

addit

ion

of

the

spat

iall

y

lagged

dep

enden

t var

iable

to

th

ese

form

ula

s, a

re n

ot

nec

essa

ry.

Page 22: M.M. Fischer and A. Berlin, Springer. cal Yardstick rbin ...€¦ · Seminar is based on three recent papers: - J.P.Elhorst (2009) Spatial Panel Data Models. In: M.M. Fischer and

Sub

stit

uti

ng t

he

solu

tion f

or

µi i

nto

the

log-l

ikel

ihood f

unct

ion,

and

afte

r re

arra

ngin

g te

rms,

th

e co

nce

ntr

ated

lo

g-l

ikel

ihood fu

nct

ion

wit

h r

esp

ect

to β

, δ a

nd σ

2 i

s ob

tain

ed

∑∑

−∑

δ−

σ−

δ−

+πσ

−=

==

=

N

1i

T

1t

2* it

N

1j

jtij

* it2

N

2,

x*]

yw

[y(

2

1|

WI|

log

T)

2lo

g(

2NT

LogL

wher

e th

e as

teri

sk d

enote

s th

e dem

eanin

g p

roce

dure

∑−

==T

1t

itit

* ity

T1y

y,

∑∑

−∑

=∑

==

==

T

1t

jt

N

1j

ijjt

N

1j

ij* jt

N

1j

ijy

wT1

yw

yw

and

∑−

==T

1t

itit

* itx

T1x

x.

Page 23: M.M. Fischer and A. Berlin, Springer. cal Yardstick rbin ...€¦ · Seminar is based on three recent papers: - J.P.Elhorst (2009) Spatial Panel Data Models. In: M.M. Fischer and

∑∑

−∑

δ−

σ−

δ−

+πσ

−=

==

=

N

1i

T

1t

2* it

N

1j

jtij

* it2

N

2,

x*]

yw

[y(

2

1|

WI|

log

T)

2lo

g(

2NT

LogL

1. R

egre

ss y

it,

Σw

ijy

jt o

n x

it (

+*)

by O

LS

→ b

0 a

nd b

1

2. C

om

pu

te r

esid

ual

s

3. S

ub

stit

ute

res

idu

als

into

log-l

ikel

iho

od

fu

nct

ion

, co

nce

ntr

ate

it w

ith

res

pec

t

to σ

2,

and

max

imiz

e it

wit

h r

esp

ect

to δ

4. β

=b

0-δ

b1 a

nd

σ2

5. D

eter

min

e v

aria

nce

-cov

aria

nce

mat

rix

(se

e pap

er)

6. R

eco

ver

fix

ed e

ffec

ts

Go t

o htt

p:/

/ww

w.r

egro

nin

gen

.nl/

elhors

t (a

nd c

lick

on

soft

war

e) f

or

soft

war

e to

est

imat

e sp

atia

l p

anel

s.

**

Page 24: M.M. Fischer and A. Berlin, Springer. cal Yardstick rbin ...€¦ · Seminar is based on three recent papers: - J.P.Elhorst (2009) Spatial Panel Data Models. In: M.M. Fischer and

Whet

her

the

random

eff

ects

model

is

an a

pp

ropri

ate

spec

ific

atio

n

in s

pat

ial

rese

arch

rem

ains

contr

over

sial

. W

hen

the

random

eff

ects

model

is

im

ple

men

ted,

the

unit

s of

obse

rvat

ion

should

b

e

rep

rese

nta

tive

of

a la

rger

p

op

ula

tion,

and

the

num

ber

of

unit

s

should

pote

nti

ally

be

able

to g

o t

o i

nfi

nit

y.

Page 25: M.M. Fischer and A. Berlin, Springer. cal Yardstick rbin ...€¦ · Seminar is based on three recent papers: - J.P.Elhorst (2009) Spatial Panel Data Models. In: M.M. Fischer and

Ther

e ar

e tw

o t

yp

es o

f as

ym

pto

tics

that

are

com

monly

use

d i

n t

he

conte

xt

of

spat

ial

ob

serv

atio

ns:

(a

) T

he

‘infi

ll’

asym

pto

tic

stru

cture

, w

her

e th

e sa

mp

ling r

egio

n r

emai

ns

bounded

as

∞→

N.

In th

is ca

se m

ore

unit

s of

info

rmat

ion co

me

from

obse

rvat

ions

taken

fr

om

b

etw

een

those

al

read

y

ob

serv

ed;

and

(b)

The

‘incr

easi

ng

do

mai

n’

asy

mp

toti

c st

ruct

ure

, w

her

e th

e sa

mp

ling

regio

n g

row

s as

→N

. In

this

cas

e th

ere

is a

min

imu

m d

ista

nce

sep

arat

ing a

ny t

wo s

pat

ial

unit

s fo

r al

l N

.

A

ccord

ing

to

Lah

iri

(2003),

th

ere

are

also

tw

o

typ

es

of

sam

pli

ng d

esig

ns:

(a)

The

stoch

asti

c des

ign w

her

e th

e sp

atia

l unit

s

are

random

ly d

raw

n;

and (

b)

The

fixed

des

ign w

her

e th

e sp

atia

l

unit

s li

e on a

nonra

ndom

fie

ld, p

oss

ibly

irr

egula

rly s

pac

ed.

T

he

spat

ial

econom

etri

c li

tera

ture

mai

nly

focu

ses

on i

ncr

easi

ng

do

mai

n a

sym

pto

tics

under

the

fixed

sam

ple

des

ign (

Cre

ssie

1993,

p. 100;

Gri

ffit

h a

nd L

agona

1998;

Lah

iri

2003).

Page 26: M.M. Fischer and A. Berlin, Springer. cal Yardstick rbin ...€¦ · Seminar is based on three recent papers: - J.P.Elhorst (2009) Spatial Panel Data Models. In: M.M. Fischer and

Alt

hough t

he

nu

mb

er o

f sp

atia

l unit

s under

the

fixed

sam

ple

des

ign

can p

ote

nti

ally

go t

o i

nfi

nit

y,

it i

s ques

tionab

le w

het

her

they

are

rep

rese

nta

tive

of

a la

rger

pop

ula

tion.

For

a giv

en s

et o

f re

gio

ns,

such

as

al

l co

unti

es of

a st

ate

or

all

regio

ns

in a

countr

y,

the

pop

ula

tion m

ay b

e sa

id

• ‘t

o b

e sa

mp

led e

xhau

stiv

ely’

(Ner

love

and B

ales

tra

1996,

p.

4),

• ‘t

he

indiv

idual

sp

atia

l unit

s hav

e ch

arac

teri

stic

s th

at a

ctual

ly

set

them

ap

art

from

a l

arger

pop

ula

tion’

(Anse

lin 1

988, p

. 51).

• ‘t

he

crit

ical

is

sue

is th

at th

e sp

atia

l unit

s b

e fi

xed

an

d not

sam

ple

d,

and t

hat

infe

rence

be

condit

ional

on t

he

obse

rved

unit

s’ B

eck (

2001, p

. 272).

In a

ddit

ion, th

e tr

adit

ional

ass

um

pti

on o

f ze

ro c

orr

elat

ion b

etw

een

µi i

n t

he

rando

m e

ffec

ts m

odel

and t

he

exp

lanat

ory

var

iab

les,

whic

h a

lso n

eeds

to b

e m

ade,

is

par

ticu

larl

y r

estr

icti

ve.

**

Page 27: M.M. Fischer and A. Berlin, Springer. cal Yardstick rbin ...€¦ · Seminar is based on three recent papers: - J.P.Elhorst (2009) Spatial Panel Data Models. In: M.M. Fischer and

Inte

rpre

tati

on C

oef

fici

ents

If th

e sp

atia

l D

urb

in m

odel

is

ta

ken

as

p

oin

t of

dep

artu

re an

d

rew

ritt

en a

s

ερ

−+

θ+

βρ

−+

αι

ρ−

=−

−−

11

N

1)

WI(

)W

XX(

)W

I()

WI(

Y,

the

mat

rix

of

par

tial

der

ivat

ives

of

Y

wit

h

resp

ect

to

the

kth

exp

lanat

ory

var

iab

le

of

X

in

unit

1

up

to

u

nit

N

(s

ay

xik

fo

r

i=1,…

,N, re

spec

tivel

y)

is r

elat

ivel

y e

asy t

o o

bta

in

βθ

θ

θβ

θ

θθ

β

ρ−

=

∂∂

∂∂

∂∂

∂∂

=

∂∂∂∂

kk

2N

k1

N

kN

2k

k2

1

kN

1k

12

k

1

Nk

N

k1N

Nk1

k11

Nk

k1

.w

w

..

..

w.

w

w.

w

)

WI(

xy.

xy.

..

xy.

xy

xY.

xY,

wher

e w

ij i

s th

e (i

,j)t

h e

lem

ent

of

W.

Page 28: M.M. Fischer and A. Berlin, Springer. cal Yardstick rbin ...€¦ · Seminar is based on three recent papers: - J.P.Elhorst (2009) Spatial Panel Data Models. In: M.M. Fischer and

If W

=

01

0

w0

w

01

0

23

21

an

d

ρρ

ρ

ρρ

ρρ

ρ

ρ=

ρ−

2

21

21

2

23

21

23

22

23

2

1

w-

1w

w1

w

ww

-1

-

1

1

)

WI(

, w

e get

.

)w(

)w

1()

w()

w(

w)

w(w

)w(

)w

()

w()

w()

w1(

1

1

xY

xY

xY

k2

3k

2

21

kk

k2

1k

2

21

k2

3k

23

kk

k2

1k

21

k2

3k

2

23

kk

k2

1k

2

23

2

k3

k2

k1

θρ

ρ−

θ+

ρβθ

ρ+

βρ

θ+

βρ

ρθ+

βθ

ρ

θρ

ρθ

+ρβ

θρ

ρ−

ρ−

=

∂∂∂∂

∂∂

Dir

ect

effe

ct:

Mea

n d

iagonal

ele

men

t

Indir

ect

effe

ct:

Mea

n r

ow

su

m o

f no

n-d

iagonal

ele

men

ts.

Page 29: M.M. Fischer and A. Berlin, Springer. cal Yardstick rbin ...€¦ · Seminar is based on three recent papers: - J.P.Elhorst (2009) Spatial Panel Data Models. In: M.M. Fischer and

Table 1.

Dir

ect

and

indir

ect

effe

cts

of

dif

fere

nt

model

spec

ific

atio

ns

[N=

3,

W a

s in

(4)]

Typ

e of

mo

del

D

irec

t ef

fect

In

dir

ect

effe

ct

Sp

atia

l D

urb

in m

odel

Man

ski

mod

el

k)

21(

3

2

k)

21(

3

)2

3(θ

ρ−ρ

ρ−ρ−

k

)2

1(3

3

k)

21(

3

23

θ+

βρ−

ρ+

ρ−

ρ+ρ

Sp

atia

l la

g m

odel

Kel

ejia

n-P

ruch

a m

odel

k)

21(

3

)2

3(β

ρ−ρ−

k

)2

1(3

23

βρ−

ρ+ρ

Sp

atia

l D

urb

in e

rror

mod

el

βk

θk

OL

S m

odel

Sp

atia

l er

ror

model

βk

0

Page 30: M.M. Fischer and A. Berlin, Springer. cal Yardstick rbin ...€¦ · Seminar is based on three recent papers: - J.P.Elhorst (2009) Spatial Panel Data Models. In: M.M. Fischer and

• O

LS

mo

del

: in

dir

ect

effe

cts

are

zero

by

con

stru

ctio

n.

• S

pat

ial

Du

rbin

err

or

mo

del

: it

can

sti

ll b

e se

en f

rom

th

e

coef

fici

ent

esti

mat

es

and

the

corr

esp

on

din

g

stan

dar

d

erro

rs o

r t-

val

ues

(d

eriv

ed f

rom

th

e v

aria

nce

-co

var

ian

ce

mat

rix

) w

het

her

in

dir

ect

effe

cts

are

sig

nif

ican

t.

• S

pat

ial

lag

mo

del

: li

mit

atio

n i

s th

at t

he

rati

o b

etw

een

the

ind

irec

t an

d d

irec

t ef

fect

s in

th

e sp

atia

l la

g m

od

el i

s th

e

sam

e fo

r ev

ery

ex

pla

nat

ory

var

iab

le.

• S

pat

ial

Durb

in m

od

el:

no

pri

or

rest

rict

ion

s ar

e im

po

sed

on

th

e m

agn

itud

e o

f bo

th t

he

dir

ect

and

in

dir

ect

effe

cts

and

thu

s th

at t

he

rati

o b

etw

een

the

ind

irec

t an

d t

he

dir

ect

effe

ct

may

b

e d

iffe

ren

t fo

r d

iffe

ren

t ex

pla

nat

ory

var

iab

les.

*

*

Page 31: M.M. Fischer and A. Berlin, Springer. cal Yardstick rbin ...€¦ · Seminar is based on three recent papers: - J.P.Elhorst (2009) Spatial Panel Data Models. In: M.M. Fischer and

Elh

ors

t J.

P., F

rére

t S

. (2

009)

Evid

ence

of

Poli

tica

l Y

ardst

ick

Co

mp

etit

ion i

n F

rance

Usi

ng a

Tw

o-r

egim

e S

pat

ial

Durb

in M

odel

wit

h F

ixed

Eff

ects

. Jo

urn

al

of

Reg

ional

Sci

ence

49:

931-9

51.

Str

ateg

ic i

nte

ract

ion a

mong g

over

nm

ents

(m

un

icip

alit

ies,

reg

ions

or

stat

es)

has

bec

om

e a

maj

or

focu

s of

theo

reti

cal

and e

mp

iric

al

work

in

p

ub

lic

econom

ics.

M

any

st

udie

s hav

e fo

und

that

an

incr

ease

in

th

e ta

x

burd

en

of

nei

ghb

ori

ng

juri

sdic

tions

of

one

euro

/doll

ar i

s m

atch

ed b

y a

n i

ncr

ease

of

18 t

o 6

6 c

ents

per

unit

of

tax i

n a

juri

sdic

tion's

ow

n t

ax b

urd

en.

A r

elat

ed l

iter

ature

focu

ses

on e

xp

endit

ure

inte

rdep

enden

ce a

nd h

as f

ound s

imil

ar f

igure

s.

Page 32: M.M. Fischer and A. Berlin, Springer. cal Yardstick rbin ...€¦ · Seminar is based on three recent papers: - J.P.Elhorst (2009) Spatial Panel Data Models. In: M.M. Fischer and

One

exp

lanat

ion i

s yar

dst

ick c

om

pet

itio

n:

vote

rs u

se i

nfo

rmat

ion

fro

m oth

er ju

risd

icti

ons

to ju

dge

the

per

form

ance

of

thei

r ow

n

gover

nors

. T

he

reas

on f

or

this

beh

avio

r is

asy

mm

etri

c in

form

atio

n;

vote

rs d

o n

ot

know

what

lev

el o

f se

rvic

es c

an b

e p

rovid

ed r

elat

ive

to a

cer

tain

tax

lev

el.

Tax

es c

over

the

min

imal

pro

duct

ion c

ost

of

pub

lic

goods

plu

s an

y

extr

a re

sourc

es l

ost

to w

aste

or

rent

seek

ing.

Thes

e lo

st r

esourc

es

cannot

be

ob

serv

ed

by

vote

rs.

Sin

ce

tax

rate

s an

d

expen

dit

ure

level

s in

nea

rby j

uri

sdic

tions

are

more

eas

ily o

bse

rved

, th

ey c

an

serv

e as

a b

ench

mar

k a

nd u

sed i

n e

lect

ions

to d

isci

pli

ne

and s

elec

t

the

typ

e of

gover

nor.

How

ever

, if

vote

rs

consi

der

re

lati

ve

per

form

ance

, ra

tional

gover

nors

wil

l do t

he

sam

e an

d (

par

tly)

mim

ic t

he

tax r

ates

and

exp

endit

ure

le

vel

s of

thei

r nei

ghb

ors

. T

his

is

ca

lled

yar

dst

ick

com

pet

itio

n.

Page 33: M.M. Fischer and A. Berlin, Springer. cal Yardstick rbin ...€¦ · Seminar is based on three recent papers: - J.P.Elhorst (2009) Spatial Panel Data Models. In: M.M. Fischer and

Pre

fere

nce

s of

rep

rese

nta

tive

resi

den

t of

juri

sdic

tion i

and

indiv

idual

budget

const

rain

t ar

e giv

en b

y

U(y

i-T

i,zi;X

i)

yi=

per

ca

pit

a in

com

e,

Ti=

tax

pay

men

t p

er

cap

ita,

z i

=le

vel

of

a

pub

lic

good, X

i=ch

arac

teri

stic

s of

juri

sdic

tion i

oth

er t

han

inco

me.

Let

z i

/Ti

den

ote

th

e m

inim

um

le

vel

of

pub

lic

good

pro

vis

ion

rela

tive

to

taxes

th

at

must

b

e del

iver

ed

for

juri

sdic

tion's

i's

gover

nm

ent

to r

emai

n i

n o

ffic

e. T

his

req

uir

ed l

evel

dep

ends

on

ob

serv

ed

pub

lic

good

level

s obse

rved

in

oth

er

juri

sdic

tions:

z i/T

i=φ

([z/

T] -

i).

Page 34: M.M. Fischer and A. Berlin, Springer. cal Yardstick rbin ...€¦ · Seminar is based on three recent papers: - J.P.Elhorst (2009) Spatial Panel Data Models. In: M.M. Fischer and

If th

e le

vel

s of

pub

lic

good p

rovis

ion re

lati

ve

to t

axes

in oth

er

juri

sdic

tions,

[z/

T] -

i, in

crea

ses,

gover

nm

ent

i is

forc

ed t

o r

aise

zi/T

i

to re

mai

n in

off

ice.

S

ince

z i

=T

i φ

([z/

T] -

i),

we

hav

e (a

nd usi

ng

med

ian v

ote

r th

eore

m)

U(y

i-T

i,zi;X

i)=

U(y

i-T

i, T

i φ([

z/T

] -i)

;Xi)

≡V

(zi,z

-i;X

i).

Note

: In

stea

d o

f one

consu

mer

, w

e m

ay h

ave

dif

fere

nt

consu

mer

s

in e

ver

y j

uri

sdic

tion w

ith p

refe

rence

s ra

ngin

g a

long a

sp

ectr

um

on

most

p

ub

lic

serv

ices

. T

he

med

ian

vote

r th

eore

m

stat

es

that

, if

pre

fere

nce

s ar

e si

ngle

-pea

ked

and g

over

nm

ent

poli

cy i

s dec

ided

by

rep

rese

nta

tives

ele

cted

by a

maj

ori

ty v

ote

, gover

nm

ent

poli

cy w

ill

refl

ect

the

pre

fere

nce

s of

the

med

ian v

ote

r.

Page 35: M.M. Fischer and A. Berlin, Springer. cal Yardstick rbin ...€¦ · Seminar is based on three recent papers: - J.P.Elhorst (2009) Spatial Panel Data Models. In: M.M. Fischer and

Fir

st-o

rder

condit

ion

)X;

z(R

z

0

VzV

ii

ii

zi

−=

⇒=

≡∂∂

,

wher

e R

re

pre

sents

a

reac

tion fu

nct

ion to

th

e ch

oic

es of

oth

er

juri

sdic

tions.

The

slop

e of

the

reac

tion f

unct

ion w

ith r

esp

ect

to z

-i

can b

e p

osi

tive

or

neg

ativ

e. A

tes

t of

the

null

hyp

oth

esis

that

the

reac

tion

funct

ion's

sl

op

e is

ze

ro

is

effe

ctiv

ely

a te

st

for

the

exis

tence

of

spil

lover

s. F

urt

her

more

, in

tera

ctio

n m

ay e

xp

ecte

d t

o

be

more

pro

nounce

d i

f gover

nors

are

poli

tica

lly s

ensi

tive

to f

isca

l

poli

cy

chan

ges

in

nei

ghb

ori

ng

juri

sdic

tions.

In

th

is

pap

er:

Dep

artm

ents

gover

ned

by

a sm

all

poli

tica

l m

ajori

ty

mim

ic

nei

ghbori

ng ex

pen

dit

ure

s on w

elfa

re to

a

gre

ater

ex

tent

than

do

Dep

artm

ents

gover

ned

by a

lar

ge

poli

tica

l m

ajori

ty. *

*

Page 36: M.M. Fischer and A. Berlin, Springer. cal Yardstick rbin ...€¦ · Seminar is based on three recent papers: - J.P.Elhorst (2009) Spatial Panel Data Models. In: M.M. Fischer and

,x

wx

yw

)d

1(y

wd

yit

ti

N

1j

jtij

it

N

1j

N

1j

jtij

it2

jtij

it1

itε

∑+

β∑

∑+

−δ

==

==

Reason to consider two regimes:

the

theo

reti

cal

and e

mp

iric

al

lite

ratu

re o

n p

ub

lic

econo

mic

s off

ers

two a

lter

nat

ive

exp

lanat

ions

for

the

exis

tence

of

tax a

nd e

xp

endit

ure

inte

ract

ion e

ffec

ts,

whic

h

hav

e th

e sa

me

reac

tion f

unct

ion.

They

may

als

o b

e th

e re

sult

of

spil

lover

eff

ects

, fo

r ex

amp

le,

bec

ause

exp

endit

ure

s on l

oca

l p

ub

lic

serv

ices

m

ay

hav

e b

enef

icia

l or

det

rim

enta

l ef

fect

s on

nea

rby

juri

sdic

tions

(see

Cas

e et

al.

, 1993 f

or

a th

eore

tica

l ex

pla

nat

ion),

or

be

the

resu

lt o

f ta

x o

r w

elfa

re c

om

pet

itio

n.

Page 37: M.M. Fischer and A. Berlin, Springer. cal Yardstick rbin ...€¦ · Seminar is based on three recent papers: - J.P.Elhorst (2009) Spatial Panel Data Models. In: M.M. Fischer and

,x

wx

yw

)d

1(y

wd

yit

ti

N

1j

jtij

it

N

1j

N

1j

jtij

it2

jtij

it1

itε

∑+

β∑

∑+

−δ

==

==

One

reas

on t

o a

dd s

pat

iall

y l

agged

indep

enden

t var

iable

s is

tak

en

from

Boar

net

and G

laze

r (2

002).

They

arg

ue

that

a n

egat

ive

gra

nt

spil

lover

ef

fect

ca

n

also

b

e in

terp

rete

d

as

a fo

rm

of

yar

dst

ick

com

pet

itio

n.

A

vote

r w

ho

sees

th

at

a nei

ghb

ori

ng

juri

sdic

tion

rece

ived

a g

rant

whic

h h

is j

uri

sdic

tion d

id n

ot

rece

ive,

may

thin

k

poorl

y o

f th

e ab

ilit

y o

f th

e lo

cal

gover

nors

and,

ther

efore

, re

duce

his

dem

and f

or

loca

l sp

endin

g.

In t

erm

s o

f m

odel

ing,

if s

pen

din

g

on p

ub

lic

serv

ices

is

taken

to d

epen

d o

n g

rants

rec

eived

by t

he

juri

sdic

tion,

the

spat

ial

aver

age

of

gra

nts

rec

eived

by n

eighb

ori

ng

juri

sdic

tions

also

aff

ects

sp

endin

g o

n p

ub

lic

serv

ices

.

Page 38: M.M. Fischer and A. Berlin, Springer. cal Yardstick rbin ...€¦ · Seminar is based on three recent papers: - J.P.Elhorst (2009) Spatial Panel Data Models. In: M.M. Fischer and

LeS

age

and P

ace

(2008)

off

er a

noth

er r

easo

n t

o a

dd s

pat

iall

y l

agged

indep

enden

t var

iable

s, n

amel

y,

an o

mit

ted v

aria

ble

s m

oti

vat

ion t

o

incl

ude

the

var

iable

s in

a

regre

ssio

n

rela

tionsh

ip

that

se

eks

to

exp

lore

inte

ract

ion e

ffec

ts i

n a

sp

atia

l co

nte

xt.

If

unob

serv

ed o

r

unknow

n

but

rele

van

t var

iab

les

foll

ow

ing

a fi

rst-

ord

er

spat

ial

auto

regre

ssiv

e p

roce

ss

do

not

appea

r in

th

e m

odel

, an

d

thes

e

var

iable

s hap

pen

to b

e co

rrel

ated

wit

h i

ndep

enden

t var

iab

les

not

om

itte

d f

rom

the

model

, a

spat

ial

lag m

odel

exte

nded

to i

ncl

ude

spat

iall

y

lagged

in

dep

enden

t var

iab

les

wil

l p

roduce

unb

iase

d

coef

fici

ent

esti

mat

es,

wher

eas

a sp

atia

l la

g m

odel

wit

hout

thes

e

var

iable

s ca

nnot.

Page 39: M.M. Fischer and A. Berlin, Springer. cal Yardstick rbin ...€¦ · Seminar is based on three recent papers: - J.P.Elhorst (2009) Spatial Panel Data Models. In: M.M. Fischer and

Reason to consider time-period fixed effects (and not spatially

autocorrelated error terms):

Iden

tifi

cati

on

pro

ble

m

Man

ski

(1993).

T

ime-

per

iod

fixed

ef

fect

s co

rrec

t fo

r sp

atia

l in

tera

ctio

n

effe

cts

among

the

erro

r te

rms,

su

ch

as

unob

serv

ed

shock

s

foll

ow

ing a

sp

atia

l p

atte

rn o

r var

iab

les

that

incr

ease

or

dec

reas

e

toget

her

in d

iffe

rent

juri

sdic

tions

along t

he

sam

e (b

usi

nes

s) c

ycl

e

over

tim

e.

The

mat

hem

atic

al e

xp

lanat

ion i

s th

at t

ime-

per

iod f

ixed

eff

ects

are

iden

tica

l to

a

spat

iall

y

auto

corr

elat

ed

erro

r te

rm

wit

h

a sp

atia

l

wei

ghts

mat

rix w

hose

ele

men

ts a

re a

ll e

qual

to 1

/N,

incl

udin

g t

he

dia

gonal

el

emen

ts.

Wh

en

this

sp

atia

l w

eights

m

atri

x

would

be

adop

ted,

one

ob

tain

s e.

g.

∑−

=∑

−=

=

N

1j

jtit

N

1j

jtij

ity

N1y

yw

y

whic

h

is

equiv

alen

t to

the

dem

eanin

g p

roce

dure

of

Eq.

(6)

but

then

for

fixed

effe

cts

in t

ime.

Page 40: M.M. Fischer and A. Berlin, Springer. cal Yardstick rbin ...€¦ · Seminar is based on three recent papers: - J.P.Elhorst (2009) Spatial Panel Data Models. In: M.M. Fischer and

,x

wx

yw

)d

1(y

wd

yit

ti

N

1j

jtij

it

N

1j

N

1j

jtij

it2

jtij

it1

itε

∑+

β∑

∑+

−δ

==

==

Pre

vio

us

stu

die

s o

n y

ard

stic

k c

om

pet

itio

n

- B

esle

y a

nd

Cas

e (1

995

), R

evel

li (

200

6)

Tw

o-e

qu

atio

ns

spat

ial

lag

mo

del

est

imat

ed b

y I

V b

ased

on

pan

el d

ata

Obje

ctio

n:

Co

effi

cien

ts o

f co

ntr

ol

var

iab

les

no

t id

enti

cal;

res

ult

s m

ay a

lso

co

ver

dif

fere

nce

s o

ther

th

an t

he

po

liti

cal

pro

cess

- B

ord

ignon

et

al.

(2003

), A

ller

s an

d E

lho

rst

(2005

)

Tw

o r

egim

es s

pat

ial

lag

/err

or

mo

del

est

imat

ed b

y M

L b

ased

on

cro

ss-s

ecti

on

al

dat

a. O

bje

ctio

n:

No c

on

tro

l fo

r sp

atia

l fi

xed

eff

ects

- C

ase

(199

3),

Sch

alte

gg

er a

nd

ttel

(20

02)

and

So

llé-

Oll

é (2

00

3)

Sp

atia

l la

g m

od

el

wit

h c

ross

-pro

du

ct v

aria

ble

s es

tim

ated

by I

V b

ased

on

pan

el

dat

a. O

bje

ctio

n:

Non

stat

ion

arit

y;

Jaco

bia

n t

erm

no

t d

efin

ed f

or

all

ob

serv

atio

ns.

∑η

−δ

−=J1

jj

jN

|W)

Pdia

g(

WI|

ln*

T

- O

ne

maj

or

sho

rtco

min

g o

f al

l st

ud

ies:

No

sp

atia

l D

urb

in m

od

el.

Page 41: M.M. Fischer and A. Berlin, Springer. cal Yardstick rbin ...€¦ · Seminar is based on three recent papers: - J.P.Elhorst (2009) Spatial Panel Data Models. In: M.M. Fischer and

,x

wx

yw

)d

1(y

wd

yit

ti

N

1j

jtij

it

N

1j

N

1j

jtij

it2

jtij

it1

itε

∑+

β∑

∑+

−δ

==

==

ML

est

imat

ion

(IV

wo

uld

igno

re t

he

Jaco

bia

n t

erm

, in

stru

men

tal

var

iab

les?

)

∑∑

λ−

µ−

θ∑

−β

−α

−∑

−δ

−∑

δ−

σ−

∑−

δ−

δ−

+πσ

−=

==

==

=

=

N

1i

T

1t

2

ti

N

1j

jtij

it

N

1j

jtij

it2

N

1j

jtij

it1

it2

T

1t

tN

2t

1N

2

,]

xw

xy

w)

d1(

yw

dy[

2

1

|W)

DI(

WD

I|lo

g)

2lo

g(

2NT

Lo

gL

Solv

e fo

r in

terc

ept

and s

pat

ial

and t

ime-

per

iod f

ixed

eff

ects

∑∑

θ∑

−β

−∑

−δ

−∑

δ−

σ−

∑−

δ−

δ−

+πσ

−=

==

==

=

=

N

1i

T

1t

2N

1j

* jtij

* it

N

1j

jtij

it2

N

1j

jtij

it1

* it2

T

1t

tN

2t

1N

2

,]

xw

x*)

yw

)d

1((

*)y

wd(

y[2

1

|W)

DI(

WD

I|lo

g)

2lo

g(

2NT

Lo

gL

Page 42: M.M. Fischer and A. Berlin, Springer. cal Yardstick rbin ...€¦ · Seminar is based on three recent papers: - J.P.Elhorst (2009) Spatial Panel Data Models. In: M.M. Fischer and

∑∑

θ∑

−β

−∑

−δ

−∑

δ−

σ−

∑−

δ−

δ−

+πσ

−=

==

==

=

=

N

1i

T

1t

2N

1j

* jtij

* it

N

1j

jtij

it2

N

1j

jtij

it1

* it2

T

1t

tN

2t

1N

2

,]

xw

x*)

yw

)d

1((

*)y

wd(

y[2

1

|W)

DI(

WD

I|lo

g)

2lo

g(

2NT

Lo

gL

1. R

egre

ss y

it,

ditΣ

wijy

it a

nd

(1-d

it)Σ

wijy

jt o

n x

it (

+*)

by O

LS

→ b

0, b

1 a

nd

b2

2. C

om

pu

te r

esid

ual

s

3. S

ub

stit

ute

res

idu

als

into

log-l

ikel

iho

od

fu

nct

ion

, co

nce

ntr

ate

it w

ith

res

pec

t

to σ

2,

and

max

imiz

e it

wit

h r

esp

ect

to δ

1 a

nd δ

2.

4. β

=b

0-δ

1b

1-

δ2b

2 a

nd

σ2.

5. D

eter

min

e v

aria

nce

-cov

aria

nce

mat

rix

. N

ot

rep

ort

ed i

n t

he

lite

ratu

re b

efo

re.

6. R

eco

ver

fix

ed e

ffec

ts

Page 43: M.M. Fischer and A. Berlin, Springer. cal Yardstick rbin ...€¦ · Seminar is based on three recent papers: - J.P.Elhorst (2009) Spatial Panel Data Models. In: M.M. Fischer and

Tab

le 2

Est

imat

ion

res

ult

s: W

elfa

re s

pen

din

g b

y F

ren

ch D

epar

tmen

ts

Ex

pla

nat

ory

var

iab

les

Tw

o-

way

spat

ial

Du

rbin

mo

del

(1)

On

e-

way

spat

ial

Du

rbin

mo

del

(2)

Tw

o-w

ay

spat

ial

Du

rbin

mo

del

,

two

reg

imes

*

(3)

Op

erat

ion

al g

ran

t 0

.00

0

(0.0

3)

0.0

31

(7.7

3)

0.0

01

(0.0

2)

W*

Op

erat

ion

al

gra

nt

-0.0

35

(-2

.07

)

0.0

31

(4.0

0)

-0.0

32

(-1

.88

)

δ

0.0

83

(1.6

1)

0.2

82

(6.2

4)

0.1

67

0.0

34

(7.0

7)

(1.5

2)

int.

eff.

=0

.18

/ 0

.20 i

n s

tud

ies

wit

h c

on

tro

ls f

or

spat

ial

fix

ed e

ffec

ts, 0

.20

/ 0

.66

in

stu

die

s w

ith

ou

t co

ntr

ols

for

spat

ial

fix

ed e

ffec

ts.

Sp

atia

l F

E

yes

n

o

yes

Tim

e-p

erio

d F

E

yes

yes

yes

Reg

ime

du

mm

y

yes

Lo

gL

1

30

5.8

3

63

8.2

2

13

14

.15

R2

0.9

41

0

.70

3

0.9

42

t-v

alu

es i

n p

aren

thes

is, *

Go

ver

no

rs b

ack

ed b

y m

ajo

rity

les

s th

an o

r eq

ual

to

75

% a

nd

g

reat

er t

han

75

%, re

spec

tiv

ely

Page 44: M.M. Fischer and A. Berlin, Springer. cal Yardstick rbin ...€¦ · Seminar is based on three recent papers: - J.P.Elhorst (2009) Spatial Panel Data Models. In: M.M. Fischer and

Tab

le 3

Yar

dst

ick

co

mp

etit

ion

an

d v

oti

ng

mar

gin

5

5%

6

0%

6

5%

7

0%

7

5%

8

0%

8

5%

Nu

mb

er o

f o

bse

rvat

ion

s

and

δ1 w

hen

mar

gin

is

less

th

an o

r eq

ual

to

.%

10

5

0.1

02

(3.6

1)

20

3

0.1

14

(3.5

0)

31

5

0.1

27

(5.4

8)

43

0

0.1

42

(5.3

5)

54

3

0.1

67

(7.0

7)

65

9

0.1

68

(3.7

3)

73

9

0.2

06

(2.3

5)

Nu

mb

er o

f o

bse

rvat

ion

s

and

δ2 w

hen

mar

gin

is

gre

ater

th

an .

%

73

2

-0.0

16

(0.2

7)

63

4

0.0

29

(0.6

2)

52

2

0.0

20

(0.7

0)

40

7

0.0

33

(1.2

9)

29

4

0.0

34

(1.5

2)

17

8

0.0

56

(1.9

2)

98

0.0

75

(2.5

0)

δ1 -

δ2

T-v

alu

e o

f d

iffe

rence

0.1

18

(1.7

8)

0.0

85

(1.5

1)

0.1

08

(3.0

1)

0.1

10

(3.0

0)

0.1

34

(4.2

6)

0.1

12

(2.1

0)

0.1

30

(1.4

0)

Dif

fere

nce

in

terc

epts

0

.62

2

0.4

62

0

.58

2

0.5

88

0

.71

1

0.5

76

0

.68

0

Lo

gL

1

30

9.2

3

13

09

.77

13

11

.54

13

11

.96

13

14

.15

13

11

.61

13

09

.05

Page 45: M.M. Fischer and A. Berlin, Springer. cal Yardstick rbin ...€¦ · Seminar is based on three recent papers: - J.P.Elhorst (2009) Spatial Panel Data Models. In: M.M. Fischer and

Tab

le 3

. B

ias

and

RM

SE

of

δ1 a

nd

δ2 o

f d

iffe

ren

t ex

per

imen

tal

par

amet

er c

om

bin

atio

ns

wh

en u

sin

g t

he

ML

est

imat

or

and

wh

en u

sin

g I

V*

ML

est

imat

or

Inst

rum

enta

l v

aria

ble

s (I

V)

Bia

s in

δ1

Bia

s in

δ1

δ1 \

δ2

-0.0

66

-0

.01

6

0.0

34

0

.08

4

0.1

34

-0

.06

6

-0.0

16

0

.03

4

0.0

84

0

.13

4

0.0

67

-0

.02

4

-0.0

22

-0

.00

3

-0.0

05

-0

.00

2

0.0

82

0

.02

6

0.0

04

-0.0

02

0

.00

0

0.1

17

-0

.01

2

-0.0

39

-0

.02

9

-0.0

03

-0

.00

2

0.0

05

0

.11

6

0.0

00

0.0

04

0

.00

1

0.1

67

-0

.00

1

-0.0

10

-0

.03

1

-0.0

10

-0

.00

2

0.0

06

0

.01

0

0.1

44

0.0

07

0

.00

3

0.2

17

-0

.00

2

-0.0

05

-0

.01

8

-0.0

29

-0

.00

7

0.0

01

0

.00

1

0.0

05

0.1

30

0

.00

9

0.2

67

0

.00

1

0.0

00

-0

.00

5

-0.0

17

-0

.03

3

0.0

02

0

.00

2

0.0

02

0.0

22

0

.07

1

R

MS

E o

f δ

1

RM

SE

of

δ1

δ1 \

δ2

-0.0

66

-0

.01

6

0.0

34

0

.08

4

0.1

34

-0

.06

6

-0.0

16

0

.03

4

0.0

84

0

.13

4

0.0

67

0

.05

2

0.0

45

0

.03

2

0.0

19

0

.01

4

0.1

01

0

.06

0

0.0

36

0.0

20

0

.01

4

0.1

17

0

.03

2

0.0

51

0

.03

9

0.0

28

0

.01

7

0.0

38

0

.12

8

0.0

52

0.0

30

0

.01

7

0.1

67

0

.02

1

0.0

38

0

.06

4

0.0

36

0

.02

5

0.0

22

0

.04

6

0.1

51

0.0

43

0

.02

7

0.2

17

0

.01

6

0.0

22

0

.03

6

0.0

57

0

.03

0

0.0

16

0

.02

3

0.0

43

0.1

21

0

.03

3

0.2

67

0

.01

3

0.0

15

0

.02

2

0.0

37

0

.04

6

0.0

13

0

.01

5

0.0

23

0.0

46

0

.09

8

* B

ased

on

10

0 r

epet

itio

ns

Page 46: M.M. Fischer and A. Berlin, Springer. cal Yardstick rbin ...€¦ · Seminar is based on three recent papers: - J.P.Elhorst (2009) Spatial Panel Data Models. In: M.M. Fischer and

Co

ncl

usi

on

s

Str

ong e

vid

ence

in f

avor

of

poli

tica

l yar

dst

ick c

om

pet

itio

n:

If D

epar

tmen

ts a

re

gov

ern

ed b

y a

po

liti

cal

maj

ori

ty i

n t

he

cou

nci

l le

ss t

han

or

equ

al t

o 7

5%

, th

ey

wil

l ch

ang

e th

eir

spen

din

g o

n w

elfa

re b

y s

even

teen

cen

ts i

n r

eact

ion

to

a c

han

ge

in s

pen

din

g o

n w

elfa

re o

f one

euro

by n

eigh

bo

rin

g D

epar

tmen

ts.

By c

on

tras

t, i

f

Dep

artm

ents

ar

e g

ov

ern

ed

by

a po

liti

cal

maj

ori

ty

gre

ater

th

an

75

%,

this

inte

ract

ion e

ffec

t d

ecre

ases

to t

hre

e ce

nts

.

Bo

th t

he

inte

ract

ion

eff

ect

of

sev

ente

en c

ents

and

th

e d

iffe

ren

ce b

etw

een t

hes

e

two

in

tera

ctio

n e

ffec

ts o

f fo

urt

een

cen

ts a

pp

eare

d t

o b

e si

gnif

ican

t. I

n c

on

tras

t to

pre

vio

us

stud

ies,

we

can

be

sure

that

th

is s

ign

ific

ant

dif

fere

nce

do

es n

ot

stem

fro

m i

gn

ori

ng s

pat

iall

y l

agg

ed i

nd

epen

den

t v

aria

ble

s o

r a

spat

iall

y c

orr

elat

ed

erro

r te

rm (

Man

ski,

1993

), s

ince

th

e fo

rmer

wer

e ex

pli

citl

y t

aken

in

to a

cco

un

t,

wh

ile

the

latt

er w

as c

ov

ered

by t

ime-

per

iod

fix

ed e

ffec

ts.

Fu

rth

erm

ore

, w

e fo

und

no e

mp

iric

al e

vid

ence

of

any a

dd

itio

nal

sp

atia

l p

atte

rns

in t

he

erro

r te

rms

of

the

fin

al m

od

el.

Page 47: M.M. Fischer and A. Berlin, Springer. cal Yardstick rbin ...€¦ · Seminar is based on three recent papers: - J.P.Elhorst (2009) Spatial Panel Data Models. In: M.M. Fischer and

Co

ncl

usi

on

s

Th

e m

od

el d

evel

op

ed i

n t

his

pap

er i

s a

two

-reg

ime

spat

ial

Du

rbin

mo

del

wit

h

spat

ial

and

tim

e-p

erio

d f

ixed

eff

ects

. W

e d

emo

nst

rate

d t

he

ML

est

imat

or

of

this

mo

del

an

d f

oun

d t

hat

th

is e

stim

ato

r p

erfo

rms

as w

ell

as,

if n

ot

bet

ter

than

, it

s

coun

terp

art

bas

ed o

n i

nst

rum

enta

l v

aria

ble

s. S

ince

we

exp

ect

that

th

is m

od

el a

nd

the

app

lica

tio

n o

f th

is e

stim

atio

n t

ech

niq

ue

wil

l al

so p

rov

e b

enef

icia

l to

oth

er

emp

iric

al a

pp

lica

tio

ns,

a M

atla

b r

ou

tin

e h

as b

een

dev

elo

ped

wh

ich

can

be

free

ly

dow

nlo

aded

fro

m t

he

firs

t au

thor'

s w

ebsi

te.

*

*