LeSage and Pace (2009) consider the impact of omitted variables in the face of spatial dependence in the disturbance process of a linear regression relationship and show that this can lead to a spatial Durbin model. Monte Carlo experiments and Bayesian model comparison methods are used to distinguish between spatial error and Durbin model specifications that arise with varying levels of correlation between included and omitted variables. The Monte Carlo results suggest use of the common factor relationship developed in Burridge (1981) as a way to test for the presence of omitted variables bias influencing specific explanatory variables.
- Bayesian model comparison methods
- Common factor relationship
- Global spatial spillovers