Where is the Economics in Spatial Econometrics?

L. Corrado, B. Fingleton

Research output: Working paperDiscussion paper

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Spatial econometrics has been criticized by some economists because some model specifications have been driven by data-analytic considerations rather than having a firm foundation in economic theory. In particular this applies to the so-called W matrix, which is integral to the structure of endogenous and exogenous spatial lags, and to spatial error processes, and which are almost the sine qua non of spatial econometrics. Moreover it has been suggested that the significance of a spatially lagged dependent variable involving W may be misleading, since it may be simply picking up the effects of omitted spatially dependent variables, incorrectly suggesting the existence of a spillover mechanism. In this paper we review the theoretical and empirical rationale for network dependence and spatial externalities as embodied in spatially lagged variables, arguing that failing to acknowledge their presence at least leads to biased inference, can be a cause of inconsistent estimation, and leads to an incorrect understanding of true causal processes.
Original languageEnglish
Place of PublicationGlasgow
PublisherUniversity of Strathclyde
Number of pages35
Publication statusPublished - Dec 2010


  • spatial econometrics
  • endogenous spatial lag
  • exogenous spatial lag
  • spatially dependent errors
  • network dependence
  • externalities
  • the W matrix
  • panel data with spatial effects
  • multilevel models with spatial effects


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