Testing spatial effects and random effects in a nested panel data model

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Journal Article
Economics Letters, 2015, 135 pp. 85 - 91
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We propose a multilevel spatial econometric model including spatially correlated error, spatially lagged dependent variable, county-level random effects and nested district-level random effects within a county. We construct joint Lagrange multiplier (LM) test to detect both the spatial effects and the random effects, LM tests to detect the spatial error correlation and/or the spatial lag dependence allowing for both types of random effects, and LM tests to detect the county-level random effects and/or the nested district-level random effects allowing for both types of spatial effects. A Monte Carlo simulation is conducted to show their good finite sample performances.
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