CPR Working Paper Series No. 102
Testing For Random Effects and
Spatial Lag Dependence in Panel
Data Models
Badi Baltagi and Long Liu
March 2008
Abstract:
This paper derives
a joint Lagrange Multiplier (LM) test which simultaneously tests for the absence
of spatial lag dependence and random individual effects in a panel data
regression model. It turns out that this LM statistic is the sum of two standard
LM statistics. The first one tests for the absence of spatial lag dependence
ignoring the random individual effects, and the second one tests for the absence
of random individual effects ignoring the spatial lag dependence. This paper
also derives two conditional LM tests. The first one tests for the absence of
random individual effects without ignoring the possible presence of spatial lag
dependence. The second one tests for the absence of spatial lag dependence
without ignoring the possible presence of random individual effects.
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