Instrumental Variable Estimation of a Spatial Autoregressive Model with Autoregressive Disturbances: Large and Small Sample Results

Harry H. Kelejian, Ingmar Prucha, and Yevgeny Yuzefovich , Spatial and Spatiotemporal Econometrics: Advances in Econometrics, ed. by James P. Lesage, R. Kelley Pace, Emerald Group Publishing Limited 18 , 163-198 , January 2004.

The purpose of this paper is two-fold. First, on a theoretical level we introduce a series-type instrumental variable (IV) estimator of the parameters of a spatial first order autoregressive model with first order autoregressive disturbances. We demonstrate that our estimator is asymptotically efficient within the class of IV estimators, and has a lower computational count than an efficient IV estimator that was introduced by Lee (2003). Second, via Monte Carlo techniques we give small sample results relating to our suggested estimator, the maximum likelihood (ML) estimator, and other IV estimators suggested in the literature. Among other things we find that the ML estimator, both of the asymptotically efficient IV estimators, as well as an IV estimator introduced in Kelejian and Prucha (1998), have quite similar small sample properties. Our results also suggest the use of iterated versions of the IV estimators.

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