“…We adopt the spatial panel data model (SPDM), a flexible model specification approach to capture possible spatial interactions of default risk on local government debts. With extensive availability of panel datasets, the SPDM has been widely applied in empirics of regional science (Almeida et al, 2021; Donfouet et al, 2018; Fingleton & Arbia, 2008; Hortas‐Rico & Rios, 2020; Santolini, 2020). The general expression of SPDM is specified as follows: where the dependent variable Risk it represents the level of debt default risk of city i in year t , which is endogenously determined by neighbouring cities' behaviours, .…”