THE SLX MODEL

ABSTRACT We provide a comprehensive overview of the strengths and weaknesses of different spatial econometric model specifications in terms of spillover effects. Based on this overview, we advocate taking the SLX model as point of departure in case a well‐founded theory indicating which model is most appropriate is lacking. In contrast to other spatial econometric models, the SLX model also allows for the spatial weights matrix W to be parameterized and the application of standard econometric techniques to test for endogenous explanatory variables. This starkly contrasts commonly used spatial econometric specification strategies and is a complement to the critique of spatial econometrics raised in a special…