New study challenges common practice in spatial econometrics, impacting policy decisions.
The SLX model, a type of spatial econometric model, is used to study how neighboring areas influence each other in a linear regression framework. This model is simple to use and allows for flexible spatial spillover effects. Researchers found that the choice of spatial weights matrix (W) can significantly impact the results, and using the same W for all spatial lags is not recommended. By analyzing cigarette demand in U.S. states from 1963 to 1992, it was shown that the results of many studies claiming robustness to W specification may not hold true.