Parameterizing Spatial Weight Matrices in Spatial Econometric Models

Abstract

Spatial econometric models allow for interactions among cross-sectional units through spatial weight matrices. This paper parameterizes each spatial weight matrix in the widely used spatial Durbin model with a different instead of one common distance decay parameter, using negative exponential and inverse distance matrices. We propose a joint estimation approach of the decay and response parameters, and we investigate its performance in a Monte Carlo simulation experiment. We also present the results of an empirical application on military expenditures. Indirect effects in particular appear to be sensitive to different parameterizations.