Testing Panel Data Regression Models with Spatial Error Correlation

Badi BALTAGI (Texas A&M University, USA)
Seuck Heun SONG (Korea University, Korea)
Won KOH (Korea University, Korea)

This paper derives several Lagrange Multiplier tests for the panel data regression model wih spatial error correlation. These tests draw upon two strands of earlier work. The ?rst is the LM tests forthe spatial error correlation model discussed in Anselin (1988, 1999) and Anselin, Bera, Florax and Yoon (1996), and the second is the LM tests for the error component panel data model discussed in Breusch and Pagan (1980) and Baltagi, Chang and Li (1992). The idea is to allow for both spatial error correlation as well as random region eects in the panel data regression model and to test for their joint signi?cance. Additionally, this paper derives conditional LM tests, which test for random regional eects given the presence of spatial error correlation. Also, spatial error correlation given the presence of random regional eects. These conditional LM tests are an alternative to the one directional LM tests that test for random regional eects ignoring the presence of spatial error correlation or the one directional LM tests for spatial error correlation ignoring the presence of random regional eects. We argue that these joint and conditional LM tests guard against possible misspeci?cation. Extensive Monte Carlo experiments are conducted to study the performance of these LM tests as well as the corresponding Likelihood Ratio tests.