A combined moment equation approach for spatial autoregressive models

Abstract

Existing methods for fitting spatial autoregressive models have various strengths and weaknesses. For example, the maximum likelihood estimation (MLE) approach yields efficient estimates but is computationally burdensome. Computationally efficient methods, such as generalized method of moments (GMMs) and spatial two‐stage least squares (2SLS), typically require exogenous covariates to be significant, a restrictive assumption that may fail in practice. We propose a new estimating equation approach, termed combined moment equation (COME), which combines the first moment with covariance conditions on the residual terms. The proposed estimator is less computationally demanding than MLE and does not need the restrictive exogenous conditions as required by GMM and 2SLS. We show that the proposed estimator is consistent and establish its asymptotic distribution. Extensive simulations demonstrate that the proposed method outperforms the competitors in terms of bias, efficiency, and computation. We apply the proposed method to analyze an air pollution study, and obtain some interesting results about the spatial distribution of PM2.5 concentrations in Beijing.