Spatial Panel Data Models

Abstract

This chapter provides a survey of the specification and estimation of spatial panel data models. Five panel data models commonly used in applied research are considered: the fixed effects model, the random effects model, the fixed coefficients model, the random coefficients model, and the multilevel model. Today a (spatial) econometric researcher has the choice of many models. First, he should ask himself whether or not, and, if so, which type of spatial interaction effects should be accounted for. Second, he should ask himself whether or not spatial-specific and/or time-specific effects should be accounted for and, if so, whether they should be treated as fixed or as random effects. A selection framework is demonstrated to determine which of the first two types of spatial panel data models considered in this chapter best describes the data. The well-known Baltagi and Li (2004) panel dataset, explaining cigarette demand for 46 US states over the period 1963 to 1992, is used to illustrate this framework in an empirical setting.