Spatial Panels

Authored by: H. Baltagi Badi

Handbook of Empirical Economics and Finance

Print publication date:  December  2010
Online publication date:  April  2016

Print ISBN: 9781420070354
eBook ISBN: 9781420070361
Adobe ISBN:


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Economists are interested in spill-over effects and externalities. Spatial models allow simple econometric methods for modeling these spill-over effects. For example, you spend more money on police in one neighborhood, you may increase the crime in an adjacent neighborhood. This externality is dependent on contiguity of the neighborhoods, their common borders, or the distance between these neighborhoods. The same idea can be applied for the analysis of welfare or trade. If California is generous in providing welfare to its residents, this may attract welfare recipients from adjacent states. Gravity models of trade use distance, common border, common language, culture and history, common colonizer, common currency, to see if these things enhance trade. These may be interpreted as distances that are economic, historic, or cultural in nature. In sum, these metrics can be used in a spatial economic model to explain crime or trade or dependency on welfare.

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