PAPERS OF Til REGIONAL SCIENCE ASSOCIATION, VOL. 65. 1988. pp. 11-34 DO SPATIAL EFFECTS REALLY MATTER I REGRESSION ANALYSIS? Luc Anselin Departments of Gengraphy and Keonomies University of Caltfornia Santa Barbara, CA 93106 Daniel A. Griffith’ Department of Geography University at Buffalo Buffalo. NY 14260 ABSTRACT A substantial hody of applied statistical science and geography deals with data collected for te spatial units af observation, These data are typically affecteel by a variety of measurement peoblents, resuling it spatial dependence and spaual heterogeneity: However, most of the empirical work fails to take this into account. In this paper, we address the issue nf the extent te which spatia effects matter in applied regression analysis. An overview of the formal methodological Problems is given, and related to the literature sn spatial statistics and spatial econometrics. 1. INTRODUCTION Over the past forty years, an important series of methodological developments have occurred in regional science and geography. based on the need to deal with the special nature of spatial data sets, ‘This hay resulted in a large number af specialized analytical techniques and led to the growth of the separate fields of ial statistics and spatial econometrics. In spite of substantial methodological advances, the issue of the relevance of the various tests and estimators in applied regression analysis still largely remains unresolved. ‘lo some extent, this may explain why for the most part these techniques have been ignored by practitioners. In this paper. we want to address the importance of spatial effects in applied regression analysis, and provide some illustration of the eatent to which they really matter. In particular, we will focus on the impact of spatial effects on the interpretation of well-known and often used regression diagnostics, such as indicators of mode! fit and misspecification tests: The paper consists of five subsequent sections. First, we briefly review the methodological progress made to date und assess the dissemination of spatial statistical techniques to empirical practice in regional science. We then proceed with a more formal discussion of the nature of spatial effects, ite. spatial dependence and spatial heterogeneity. ‘This is Followed by two specific examples of the impact of spatial effects on standard methods. In particular, we illustrate how spatially autocorrelated regression error terms affect the indication given by the Mallows C;, Index and by tests ayainst hetcroskedasticity. These two topics have been selected for illustrative purposes. Other, possibly more common. statistics, such as X’ and £, will be treated in subsequent research projects. As an aside, a fuller discussion of the three methods discussed here for detecting J evonometric alysis in regional a “Address after August 1, 1988: Department of Geography. Syracuse University, Syracuse, 13244-1160.n PAPERS OF THT REGIONAL SCIPNCE ASSOCIATION, VOL, 65, 198 hetcroskedasticity is presented in far more detail in Anselin (L988b), We close with some concluding remarks and an outline of a research agenda. 2. PROGRESS AND DISSEMINATION The awareness af the problems caused by spatial structure and spatial dependence, and their effect on the validity of traditional statistical methods is not _recent, bul can be traced as far back ay Student (1914). However, the beginning of the development of a separate held of spatial statistics is more appropriately attributed to the derivation of the first formal indices to detect the presence of spatial autocorrelation, in the work of Moran (1948), Geary (1954). Krishna [yer (1949), and Dacey (1968), and the introduction of the analysis of simultancous spatial process models in Whittle (1954) and Mead (1967), ‘The ceal exposure of regional science and geography to spatial statisties was achieved by the work of Cliff’ and Ord. in a series of articles and books in the late 1960s and carly 1970s (e.g. Cliff and Ord 1969; Chill and Ord 1973), complemented by the formal treatment of estimation and distributional issues by Besag (1974), Ord (1975), Sen (1976) and Haining (1978), among, others, After this initial problem recognition phase. the development of spatial statistics in the late 1970s and carly 1980s focused on a refinement of the original framework, with an emphasis on narrower issues of estimation and testing. For example, several new spatial autocorrelation statistics and extensions to multi- variate analysis were developed. by, among, others, Royaltey, Astrachan, and Sokal (1975), Sen and Soot (1977), Lostheim (1978), Streitberg (1979), Burridge (1980), Glick (1982), Hubert and Golledue (Hubert, Golledge, and Costanzo 1981; Hubert and Golledge 1982; Costanzo, Hubert, and Golledge 1983: Hubert ct al. 1985), and Wartenberg (1985), Further development of the estimation identitication, and model specification for spatial process models, and extensions fo the spacetime domain, were carricd out by, eg, Haining (1977, 1979), Bennett (1979), Pfeifer and Deutsch (1980, 19806), Hooper and Hewings (1981), and Mardia and Marshall (1984), Specific attention to the geometric antributes of spanal data sets, such as those assocrated with sputial aggregation and edge effects, is reflected in the work of Openshaw and Taylor (1979. 1981), Haggett (1980, 1981), R. Johnston (19%4), Griflith (1980, 1983, 1988, 1987, 1988c), and Martin (1987) Recent overviews of the various issues addressed in spatial statistics eat be found in Getis and Boots (1978), Ripley (98D). Chill and Ord (981). Diggle (1983), Gaile and Willmott (1984), Upton and Fingleton (1985), and Griffith {198Ra, In a parallel development, the fick! of spatial econometrics has come wo encompass collection of methods to deal with spatial effects in econometric models. The term spatial econometrics was coined by Paclinck in the early 1970s; (see the historical review in Paelinck and Klaassen 1979), and originally referred primarily to efforts in dealing with spatial autocorrelation in regression residuals, eg. in Fisher (1971), Hordijk (1974, 1979), Unwin and Hepple (1974), Hordijk and Paclinck (1976). Bodson and Peeters (1975), Hepple (1976). Arora ancl Brown (1977), and Bartels and Hordijk (1977). An carly consideration of the problem of spatial heterogeneity (or spatial contextual variation) was the spatial expansion method of Cusetti (1972. 1973), More recent developments in spatial econometrics deal with extensions of these carher eflorts in various directions. Spatial elects in regression residuals are further considered by, e.g... Brandsma and Ketellapper (1979), Sen. Srivastava, and Tiwari (1986). and Anselin (198Ka), Mare complex models, and extensionsANSELIN AND GRIFFITH: SPATIAL, FTFECTS IN REGRESSION ANALYSIS a to the space-time domain are discussed in Hordijk and Nijkamp (1977. 1978), Bartels and Ketellapper (1979), and White and Hewings (1982). Alternative estimation and modeling approaches have been suggested ancl applied: Bayesian approaches in Hepple (1979), and Anyelin (1982); soft and qualitative modeling. in Nijkamp (1982) and Nijkamp and Rietveld (1982); bootstrapping and jack- knifing in Stetzer (1982a), and Folmer and Fischer (1984): spatial LISREL models in Folmer (1986); and, heuristic estimation procedures in the spatial adaptive filtering approach of Foster and Gorr (1983. 1984, 1986). Also, the spatial expansion method of Caselli has been further refined and has seen a wide range of applications, e.g. in Jones (1983, 1984), Brown and Jone (1986), and Casetti and Jones (1987. 1988). In the 1980s. subs has focused on problems of model specification and model validation, e.g. i Buck and Hakim (1981), Burridge (1981), Stetzer (192%), Blommestein (1983), Bivand (1984), Blommestein and Nijkamp (1986), and Anselin (1984, 1985, 1986), Recent overviews of the various issues addressed in spatial econometrics be found in Paclinck (1982), Bahrenberg. Fischer, and Nijkamp (1984), Nijkamp, Leitner, and Wrigley (1985), and Anselin (19872, 1988b). The study of the effects of spatial dependence and spatial heterogeneity has not been limited to regional science and geography. Indeed, the importance ol spatial autocorrelation has been acknowledged and led to applications and methodological developments in geology (Matheron 1971), ecology (Kooiiman 1976: Getis and Franklin 1987), biology (Sokal and Oden 1978}, cancer research (Glick 1979), epidemiology (Cook and Pocock 1983: Pocock, Cook, and Shaper 1982). psychology (Hubert 1984. 1985), sociology (Doreian 1980, 1981: Doreian, Teuter. and Wang, 1984), demography (Lattin and Ward 1983), and anthropology’ (White, Burton, and Dow 1981). In contrast to this stands the almost total ignorance of spatial eflects in the jcal and econometric literature. For example, in recent statistics textbooks such as Montgomery and Peck (1982), no mention of the spatial effects problem is found at all. In another. by Neter. Wasserman. and Kutner (1985), the problem of spatial autocorrelation is mentioned in a footnote (p. 901), but then dismissed as a comptication that can be accommodated by increasing the number of randomized replications in an experiment, A similar situation exists for econometric texthooks, where a discussion of spatial effects is absent in most of the more popular texts, such as Maddala (1977), and. Pindyck and Rubinfeld (1981), as well ay in more advanced treatments, such as Vinod and Ullah (1981), and Amemiya (1985), When spatial autocorrelation iy mentioned at all, its treatment is usually limited to a brief remark. For example. Kennedy (1985) points to its existence as a possible cause for autocorrelation in regression error terms. and in the encyclopedic text by Judge et al. (1985). it is listed as one of the motivations for the use of seemingly unrelated regression models. Rare exceptions are Kmenta (1971) and J. Johnston (19R4), where crosssectionally correlated error terms are treated. Hor the former book this treatment is within the context of pooling eruss-section and time series. for the latter book spatial autocorrelation in the error terms of a segression model is introduced as a special case of serial dependence The general emphasis in econometrics on time series data and dynamics is also predominant in the more recent focus on panel data (ey., Hsiao 1986), where potential dependence across corss-seetional units is typically assumed away. A notable exception here is the work of King and Evans (1985. 1986) on block structures in survey data, where the Durbin-Watson test is applied.“4 PAPERS OF THE REGIONAL SCIENCE ASSOCIATION, VOL. 65, 1944 This lack of consideration of the complications caused by spatial effects is also reflected in the practice of statistics and econometrics. in that spatial techniques are absent from standard regression packages. such as SAS or SPSSX, commonly used by regional scientists and economic geographers. As a consequence, there has been an almost total lick of diffusion of the spatial statistical and spatial econometric techniques to empirical work in regional science and geography. Even though the type of data used in this empirical work, such as aggregate observations for states, counties, ar census tracts. is likely to reflect spatial structure and to be subject to various spatial spillover elects, the spatial autocorrelation and spatial heterogeneity which may result_are almost completely ignored. For example, except for the work of Casetti (1973), Grifith (1981), and Anselin and Can (1986), the vast empirical literature on urhan density functions estimated from census tract data fails to take into account any spatial effects (see the overview by Kau, Lee. and Sirmans 1986} In general, the actual application of appropriate spatial techniques in situations where they are likely {0 be relevant has been very limited within the academic community of regional scientists and geographers. To further illustrate this point, consider articles in journals which are typically receptive to the publication of a I developments in spatial stalistics and spatial metrics, such as Gengraphical Analysts. the Journal of Regional Seience, and vironment & Manning A. A brief Survey of the issues of these three journals which appeared afler 1985, classified by category of regression analysis, is presented in ‘Table I. We identify articles that use time series data, space-time data, cross-sectional data, and micro data, as well as methodological topics, Under each classification in Fable [we list in parentheses the nunither of articles that take into account dependence either of a serial or of a spatial nature, OF the 85 articles, only 1X.5 took these effects into account. More strikingly, in analyses using time serics data more than half of the papers (9.5 out of 16.5) considered serial dependence, whereas in articles that used cross-sectional data dependence was essentially ignored (three out of 41.5), In sum, even though the methodological results achieved inthe fields oF spatial statistics and spatial econometrics have been substantial, the dissemination from the research communily to the applied world has heen virtually nonexistent TABLE 1. Classification of Articles Appearing in Selected Regional Science Journals by Type of Regression Analysis Spatial Time Series Tome Series Spatial Series Methodology Micra Dat Year GAU TRS ERPAY GA TRS FAPA GA IRS E&PA GAUIRS EEDA IRS E&PA Irs A OO od OF OY & & OG OH O MH w we OY OT" bp 9 8 voy gg OB & HY MO HY BOO Ws GO OM O ray oP gy a 2 4 0 Oo 1 OH ® © O&O OH Ow ® OM H M O * Ga denotes Geographical Analysis, RS denotes Journal of Regional Science, ad EPA denotes Environment & Plannarg "Some of the articles analyzed a combination of tin spatial tine series and/or micro data. Accordingly fractions of these papers were assigned to cach (ype af analysts wielding the fractional numbers nf 4.8, 5. and 2.8 for the 19%S article counts, "Numbers in parentheses indicate the number af analyses that ailempted to employ dependent observation methodology FUOST includes through #4 in GA, #3.un JRS, and #4 in ERPAANSELIN AND GRIPETTH: SPATIAL EFFECTS IN REGRESSION ANALYSIS Is 3. THE NATURE OF SPATIAL EFFECTS IN REGRESSION ANALYSIS aatiul Dependence In many instances where regression analysis is applied to cross-sectional data, various measurement problems, spatial externalities, and other spillover effects may lead to dependent error terms, In addition, in the empirical imple- mentation of models of spatial processes, spatial structure, or Spatial interaction, the dependent variable at one point in space may be functionally selated to its Values at some or all other locations in the system. In other words, spatial dependence is reflected in regression analysis in two distinct forms, one as a misspecification and the other as a result of the explicit modeling of space. In more formal terms, these two basic representations of spatial dependence can be expressed as v= fi X80) or 6 = Ke AD, where y’ is the dependent variable, V is a set of explanatory variables, and \ are vectors of parameters, and e and & are error terms The functional forms /'and g express how realizations of yor ¢ at one point in space are related to their counterparts in the rest of the system. In most implementations f/and g are taken as simple linear expressions. Typically the interaction between the value at one location and values at locations in the rest. of the system takes the form of a weighted sum, such as Cy or Cr. The elements of the weight matrix € reflect the potential spatial interaction between the data points, and often are binary in form. The relevance of the two forms of spatial effects for the results of regression analysis differs, In the modeling of explicit spatial processes with spatially lagged dependent variables, a number of results that would hold in a time series context no longer are vatid. For example, in space. nonlinear maximum likelihood estimation is necessary whether or not the error term is dependent, In contrast, in the absence of serial correlation in the disturbance, ordinary least squares (OLS) would result in consistent parameter estimates in a time series context, Spatial dependence in the disturbance terms results in a nonspherical error covariance matrix of a particular form (i.c., it is not of the form a2), ‘The dependence can be formally expressed in a number of ways. Similar to time series analysis, an autoregressive or moving average formulation could be used. In addition, the probabilistic framework can be based upon a conditional or a simultancous viewpoint. Each form implies restrictions on the parameter values, resulting from stationarity and inventibility requirements. The difference between the various forms can be illustrated by the associated error variance-covariance matrices. For a conditional model this matrix is od -0CY', where o° is the error variance, p is a spatial autocorrelation parameter, C is the weight matrix, and J is the identity matrix. For a simultaneous model the error covariance matrix has the form ol ~ o€YU = pO) * For a moving average model the matrix isPAPERS OF TILE REGIONAL. SCIENCE ASSOCIATION, VOL, 65, 1988 ol ~ 0), ‘The effects of spatial dependence in the error term are the same as for any nonspherical disturbance variance matrix. The regression coefficients will remain unbiased using OLS, but significance tests and measures of fit may be misleading. ‘This result is due to the biased estimation of error variance, 1 test Spatial Heterogeneity Many phenomena studied in regional science could also lead to structural instability over space, in the form of systematically varying parameters or different response functions, In addition, as in the previous section, the measurement errors that result from the use of ad hoc spatial units of observation are likely to be nonhomogencous and can be expected to vary with location, area, or other characteristics of the spatial units. To the extent that these aspects of heterogeneity can be relitted to spatial structure, or are the result of spatial processes, they could be designated as spatial heterogeneity. This includes familiar econometric problems such as heteroske- dasticity, random coeflicient variation, and switching regressions. Obviously, many features of heterogeneity are easily taken into account by the use of standard econometric techniques. However, in this article, we will focus on some aspects which have a distinct spatial Navor. Spatial heterogeneity has been taken into account in a variety of ways in empirical work in regional science. For example. systematic variation of param- eters with location is accounted for in the spatial expansion method of Casetti (1972, 1986), und rundom parameter vuriution in spatial data is analyzed urban density studies by Kau and Lee (1977), Johnson and Kau (1980), and Kau, Lee, and Sirmans (1986). Structural change of a discrete nature, expressed in the form of switching regressions has heen implemented in the work of Brueckner (1981, 1985, 1986), and Kaw, Cer, and Chen (1983) Instances where heteroskedasticity is incorporated are the urban analyses of Greene and Barnbock (1978), and Anselin and Can (19%6), In general terms, there are two distinct aspects to spatial hieterogene: is structural instability as implied by changing functional forms or va parameters, Formally, this can be expressed as: One ing, Mey BY ¥ where i denotes a spatial unit of observation, y and x are the dependent and explanatory variables, 8, is a K-by-1 vector of location specific variables. f, is a location specific functional form, and ¢, is a stochastic error term. The extent of spatial heterogeneity that can be formally incorporated in models such as this is limited by the incidental parameter problem, ie.. the situation where the number of parameters increases directly with the number of observations. ‘To avoid this problem, the hyterogeneity needs to be expressed in terms of a few distinct categories or parameters. Vor models with varying coefficients, such as the 8, above, this implies that the variation should either be determined systematically. as a function of a small number of additiona variables (as in the spatial expansion method). or stochastically, in terms of a priori distribution (as in the random coefficient approach). In the case of structural instability of the functional form, such as the fin the above expression, the number of different regimes that can be efficiently estimated is limited by degrees of freedom considerations,ANSELIN AND GRIFFITH: SPATIAL EFFECTS IN RFGRESSION ANALYSIS 0 Another aspect of spatial heterogeneity is heteroskedasticity, which follows from missing variables, or other forms of misspecification that lead 10 error terms with nonconstant variance. Formally, the ercor variance is: var (¢) = 03, where the «? differs for all or for a subset of the i. Specific spatial heterogeneity would link the variation in @? to location, area, or differential spatial structure in the observational units, Ignoring either aspect of heterogeneity has well-known consequences for the statistical validity of the estimated model: biased parameter estimates (but not in the presence of heteroskedasticity only), misleading significance levels, and suboptimal forecasts. Joint Effects In many situations, the basis for the specification of the particular form of heterogeneity in spatial models can be derived from. regional science theory. In Particular, theories of regional structure and urban form can provide insight into characteristics of spatial data sets that are likely to cause heterogeneity, as welt as provide important variables that determine its form A complicating factor in spatial analysis is that the misspecifications and measurement errors that may lead to heteroskedasticity, such as the problems with the choice of a spatial unit of observation, are also causes for spatial autocorrelation (Anselin 19874). It is therefore important to consider the effect of the presence of one type of misspecification on the tests for and estimation of the other, and to analyze the extent to which the two effects can be V0 ~ pd) WU ocr] Therefore, DUC © pd WUE pO) WIN = N+ 2 In the absence of spatial autocorrelation, for » = 0, this expression reduces to T, = N= N/N ~ N +2 = 1, which is the standard result,ANSELIN AND GRUFELTH: SPATIAL, EFETCIS IN REGRESSION ANALYSIS 2 To illustrate further, we consider a range of spatial autocorrelation values pd = -0.9, -0.5, =0.1, 0.1.0.5, 0.9, and a number of different lattice sizes that cover many of the sample sizes encountered in applied spatial analysis. Due to the special structure of the conditional model, the spatial autocorrelation is represented by the product of the spatial autocorrelation parameter » and the principal eigenvalue , of matrix C. The contiguity matrix C is detined as the rook's case on a regular, square lattice. ‘The results for dimensions 2-by-2 to 10+ by-10 are reported in. Table Three general patterns hecome apparent in these numerical results. First, the Mallows C,, index increases in magnitude as the lattice increases in size Second, the Mallows C; index increases in magnitude as the level of spatial autocorrelation increases (this should not be surprising), but is not affected greatly when pd, is small. It should be noted thal, as demonstrated by Bartlett (1975), even for a [pd,| = 0.9. the latent level of spatial autocorrelation corresponds to at first-order lag value py of about 0.4. Third. the Mallows ¢ index is more severely atfected by negative than by positive spatial autocorrelatior in some cases this is dramatic. The trends in ‘Table 2 furnish some evidence that this difference between positive and negative spatial autocorrelation tends to disappear with increasing lattice size To summarize, it is clear from the numerical results for the simple example that when ignored, spatial autocorrelation can significantly aifeet the indication provided by a regression diagnostic such as Mallows C, 5. THE EFFECT OF SPATIALLY CORRELATED ERRORS ON TESTING FOR HETEROSKEDASTICITY Karmal Aspects In a time series context. the effect of serial error autocorrelation on the performance of tests for heterogeneity has received some attention in the standard. econometric literature. For example. in Epps and Epps (1977). the validity of the Gilejser (1969) and Goldfeld and Quandt (1972) tests was found to be affected by first-order autoregressive error terms, As shown in Ansclin (19870). similar results hold in the case of spatial dependence. When the error terms fail to be independent, the distributional properties of several parametric tests for hetwroskedasticity are no longer vali. More precisely, this is due to the use of the characteristics of quadratic forms in independent normal variates as the basis tor deriving the asymptotic distribution TABLE 2. Expected Value of Maliows C;, Index When Spatial Effects Are Ignored for Selected Levels of Spatial Autocorrelation and a Conditional Autoregressive Model nym a fates, os 4 “1 190000 Lary 909t j iisae Vise Sass 3 ons ibe Sab 3 Minti ta aave Hisi) Moa & eo 30.5358 Pn Sob 5 Xkss 35308 Vo § Miste MEGS Sem? aka 1565, 33576 $ Rwoad 34225283 T3asa trad S183 M2500 wo 38580592 Ass) ato 93817 Naor2 PAPERS OF THE REGIONAL SCIENCE ASSOCIATION, VOI 5, 198s of most test statistics. Consequently, in the absence of independence these results will no longer hold. In the next section, we illustrate this effect by means of a series of Monte Carlo simulations. Specifically, we assess the influcnce of spatial autocorrelation in the error terms on the power of three well-known tests for heteroskedasticity: the Glejser (1969), Breusch-Pagan (1979) and White (L980) tests. The first two procedures presume knowledge of the variables that cause nonhomogencity, while the White approach is specification robust In addition, we also assess the small sample performance of a sequential testing procedure based on the asymptotic Lagrange Multiplier (1-M) approach, suggested in Anselin (1988a). This consists of first testing for the joint possibility of heteroskedasticity and spatial autocorrelation. and next for one or both of these effects in isolation, The joint test is equivalent to the sum of a Breusch- Pagan statistic and an LM test against spatial residual correlation (see Burridge 1980: Anselin 1988a) UPA ZZ EG + C/T Wf’ ~ Coen where f= (a"'u)’ — 1, which is element # of vector f T= (WW + W), a. vector of OLS residuals 1, a*, the ML. variance based on OLS residuals. Z.an N-by-(P + 1) matrix of a constant term and the variables that cause heteroskedasticity, und Wa spatial weight matrix. A rejection of the joint null hypothesis is tillowed by a test for each of the special cases, In the process of carrying out this sequential procedure. the eritical levels used as the basis for rejection of the respective null hypotheses should be adjusted to obtain a correct assessment of the multiple comparisons. For example, this could be achieved by using Bonferroni bounds, which would consist of dividing the overall desired significance level by the number of comparisons (as in Savin 1980), Monte Carle Analysis The Monte Carlo experiments were designed to capture a number of interactions between degree of heteroskedastivity, spatial dependence, and number of observations. They are based on a simple linear regression: Sati te where a and g are set equal 10 one, x is a uniform random variate (between 0 and 10), and ¢ is. normaily distributed error term. Given the invariance results of Breusch (1980), the magnitude of the and 4 coetlicients will not affect the inference about the components of the error covariance matrix, and therelore their respective values could be assigned arbitrarily. ‘The spatial arrangement of the data points is such that the asymptotic properties are well behaved (see, e.g., White 1984), Specifically, the heteroske~ dasticity is constructed as a function of Jocation, but the incidental parameter problem is avoided. The smallest data set is taken as a S-by-S regular square lattice, with the coordinate system centered in the lower left corner (without loss of generality), Increasing numbers of observations are obtained by adding a similar regular lattice to the right, which results in a data set of 50 observations asa 10-by-5 rectangular lattice, and a data set of 75 observations as a 15-by-SANSELIN AND GRIFPITH: SPATIAL EFFECTS IN REGRESSION ANALYSIS. 2 ular lattice. The values for the X matrix [4x] are based on NV = 25, and kept fixed in all simulations. Hor the larger data sets, the set of 25 observations. issimply repeated. to ensure that the asymptotic properties are regular. Specifically, this design forces the matrix X'X/.V to be fixed as V increases, which is necessary for proper asymptotic behavior, The heteroskedastivity is expressed as a function of the vertical coordinate, varles] = A= yw + ie: Since the 2» = S, and the increase in sample size is realized along the horizontal coordinate, this cnsures that the error variance is bounded, which is also required for asymptotic regularity. The extent of heteroskedasticity is parameterized as a function of the coefficient y,. which takes on the values 0, 1/3, 1, and 3. This results in a maximum error variance ratio between the largest. and smallest values of | (ic., the aull hypothesis of homoskedasticity), 2, 3. and 4, respectively. Spatial dependence in the error term is expressed in terms of a standardized first-order contiguity (using the queen concept of contiguity). Boundary effects and potential misspecification of the weight matrix can he cxcluded from the analysis, since the primary interest is on the performance of tests against heteroskedasticity. Therelore, the correct weight matrix is assumed to be known, in the implementation of the LM test for spatial autocorrelation. The spatial dependence is formalized as a first-order autoregressive process: ca phe te with p taking on the values -0.9, -0.5. ~0.1, 0. O.1. 0.5, and 0.9, to reflect a range of extreme to mild autocorrelation, positive as well as negative ‘The simulated values are obtained in four steps. First, a vector of standard normal variates » is generated. using the random generator in the GAUSS: statistical package, Next, a vector of heteraskedastic variates is constructed, by premultiplying » with (1): B= (ANY, In the third step, the spatially autocorrelated error terms are obtained as c= Wyle Finally, the vector y is constructed by adding « + Ax to the error term. In order to limit the extent of extraneous random variation from the use of poor random numbers, all generated vectors were subjected to a series of filters, to test for normality and for the luck of spurious spatial dependence. Specificully. to limit variation between experiments, all random vectors were constructed in increments of 25, and the larger dats sets (WV = $0, 75) contain the same random variates as the smaller sets (i.c.. the first 25 and 50 observations. tare the same). At all three levels, a series of tests for normality, based on the first to fourth moments (see Kiefer and Salmon 1983), and a Moran test for spatial autocorrelation were used as filters, where random vectors were rejected at the 10% significance level. Although this procedure is sometimes criticized as being too artificial, we felt that it considerably decreased the influence of spurious, effects beyond the control of the experiment. That these effects should not be neglected, was illustrated by a much larger proportion of rejected vectors than the nominal significance level under the null hypothesis would imply. For example.198s 24 PAPERS OF THE REGIONAL SCIENCE ASSOCIATION, VOL. 6: to obtain 1000 sets of acceptable 75-by-1 vectors. a total of 4712 generations of 2Ssby-1 subvectors was needed. All experiments were replicated 1000 times. ‘The results for N N 50, and V'= 75 are listed in Tables 3, 4, and $. For each of the combinations of heteroskedasticity and spatial autocorrelation, the frequency of rejection of the null hypothesis, at a nominal significance level of p= 0.05 is given (with the estimated standard error in parentheses} for the Cilejser test (G). the Breusch- Pagan test (BP), the White test (W), and the sequential procedure (LMSH and I.MSH-H). (t should be noted that for the latter. the nominal significance level was adjusted to p= 0.025 tar each step, according to Bonferroni bounds. which resulis in un approximate overall signiticance of » = 01.05. Also, since the LMSI-H procedure ts equivalent to the Breusch-Pagan test at half (p = 0.025) the significance level of BP. it will always have less power, The results for tl test are listed for the sake of completeness. and to illustrate the loss of power that results in a sequential approach when the significance levels are properly adjusted. Rejection of the null hypothesis is based on the critical level for a two-sided 1 test for G, for a chi-square statistic with one degree of freedom for BP and LMSH-H. and for a ch fe statistic with two degrees of freedom for W and LMSH. It should be noted that the asymptotically robust White test does not use the information on the specific nature of heteroskedasticity, and thus, performance will tend to be rather poor. In contrast, in the G. BP. and LMSH approaches. perfect knowledge of the precise nature of heteroskedasticity is assumed, which is less likely to occur in an applied context From the results in Tables 3-5 it becomes clear that spatial autocorrelation does have an effect on the performance of tests against heteroskedasticity, although it does not affect all tests equally. With the exception of the White test, for which performance is poor overall and does not vary much (although slightly improving with sample size), the empirical rejection frequencies, under the null as weil as under the alternative hypotheses, change considerably in the presence of large and particularly positive spatial autocorrelation, Effects of large negative aute- correlation are less pronounced and not always in the same direction. Smaller values of » do not seem to have a pronounced cflect. Under the null hypothesis of no heteroskedasticity. both the BP and W tests tend to reject less than their nominal significance levels would indicate. However, the difference is not significant for W tor small sample sizes (only for N= 75) and only significant for BP for N= 78. On the other hand, the empirical rejection frequency of the Glejser test does not show a significant difference frou: its nominal level. Also, the combined LMSH test achieves a rejection frequency that is significantly lower than its nominal level, in line with the general tendency of LM tests fo under-reject in finite samples when asvmptotie significance levels are used. ‘The effect of spatial autocorrelation in this situation (4, = 0) is pronounced, yielding rejection frequencies for G and BP of up to three times the nominal level when » = 0.9. There is some evidence that the effect of negative autocor- relation decreases with N. while that of positive autocorrelation increases, Also. in relative terms, the BP test seems more sensitive 10 spatial autocorrelation than does the G test. In other words, both the G and BP tests tend o reject the null hypotheses too often when there is no need 10, as a result of the influence of spatial dependence. In terms of power (i.e., when y, #0) the relative ranking of the tests is not affected, with G > BP => W, although rejection frequencies clearlyANSELIN AND GRIFFITH: SPATIAL EFFECTS IN REGRESSION ANALYSIS 23 TABLE 3. Rejection Frequencies for Tests Against Heteroskedasticity in the Presence of Spatial Autocorrelation iN p= 0.05 for G, BP. W; p = 0.025 for [MSH LMSH-IP) o Test weo us 1 3 09 «G ore v9? ost 402 (a.nn%) «019 was, Oto BP ‘080 oa? 220 x01 (0.009) (011 aL wars w 0.087 ‘aOR ont 8.032 coon (008) 0.006) MSH st 27% iar) @ouy wo ours) UMSH-H, 0.034 133 184 0.006) wel) wordy -05 G 0.063 0.379 (0.00%) wors) BP vst 280 «on7, wor w 204K 0.042 (0.007) (6.000) 0.009) (2006) LMSH out 109% 0.183 0,208 (o.nn6) w.009 012) woLy LMSH-H vols 033 101 0.148 (ond) «oor wow wor “01 G 0.080 utr 204 a9 19.007) ony words wg.atsy BP 0, at 0199 0.267 w. woul woes wo.otay w ngs ‘0d 0.085 (0.06) 006) 40.097) Last 0.032 ‘o0ry ony 400%) (00K) «satay LMSH-IL ons 061 0.103 (0.003) 05) 0.00% woo, 00 G due 0.170 0,369 (oan, (or wars, Bp 029 0.101 268 (omisy (oto wars w 04 (0.085 88 omy, wou « juny LMsit 0.007 ast 0.05: ous 1.003) (ous ary ron LMSI-H 0,007 0.036 n0a7 iss woos) (uns wiry (bn) ol G 04K 163 0.26 49,007) wow way BP one 11096, oN (0.005) wou (wala w 046, 0042 hoas (0.007) aunt aan IMs ‘040077 038 ua (0.003) 10.005 «ony UMsiat 0.007 0004 Uuds ual «003 ce. oi comms 0s 6 0.046 O58 12% 261 wor (ory (obra wars be 0.027 L087 8.166 0.234 05) cosy apny won w 0.037 0.037 041 ‘0.045 (0-006) «a.000) (8.006) 40.007 EMsit 0.060 0093 0.13 0.186 «00K 00 oar, 0.013) IMsHeH 0.003 i034 v.00 ‘092 avnay 00% (0.008) «009» PAPERS OF THE REGIONAL SCIENCE ASSOCIATION, VOL. 65, 1988 TABLE 3. (Continued) p Test neo Wa L 3 a G 0.081 0.167 0284 0.307 (0.008) (ond 1018) (013) Br 1.066 Ol 0.169) D216 (0.00%) nth) won wary, w 0.036 034 a ‘ods (0.006) cone o ony LMsit 0,604. 1082 ‘0692 0.015) «ary 0 wars, LMSH- ‘a0n7 089 0.109) 0129 (0.000) coin, (OUI (ol *G denotes the Gilejser test, BP denotes the Breusch-Pagan test, W denotes the White test, LMSH denotes the heieroske- pane line (LM on ot spatial (8) dependence dasticity (11), and LMSH-H clenotes the LMSH sequeatrally followed by a test for et (CH). Estimaied standard error roskedastcity ate in parentheses TABLE 4. Rejection Frequencies for Tests Against Heteroskedasticity in the Presence of Spatial Autocorrelation (N = 50: p = 0.05 for G, BP, W: p = 0.025 for LMSH, LMSH-H") po Test neo us L 3 “09 6 07} 0298 v.79 eau «00x wood w.0ie) (u1sy BP 0.080" nn? 0 3R0) 320 ca.oney giz» (o.018) wiles w ‘00037 as U0g6 «0.006 0.006) LMSH asst 0.632 N05 mie wis cnensy LMSH-H U.028 0.113 0397 (0.005) ody iatsy 0s G 0.063 0264 0.669) oan, (wold) O15) BP .0aa L186 0847 (nny 01 cosy Oley w ‘oad “1080 04s 051 (0.006) 1.0069 (097 0.00?) LMSH 0.119) 0.235 ‘0433 S41 10.910) ) (wQiey wanes LMSH. 0.023 0.380 (0.005) 2.010 wos Ol G 9.083 0.266 0.688 coor uid sy BP 0032 ‘175 0.542 (6.0069 wo doiites w cosa: ‘0037 088 ‘061 6.006) (0.006) (0,007) 40,008 LMSH cou 0.081 0192 0.299 (0.0033 i) uly wna, UMSH-IL 0,00 07! 0.13% 0.244 £9,003) conn oun) opis 00 G ‘vay 27 0.510 0.685 Woon cou cones BP W030 nS us31 (6.005) (ony «sary w ‘anes 0 008) (0.1063 (G.006) ont) LMSH 1.008" 084 0,165 274 (9.002 «9.00% wor coniay LMSH-H. 0.006, 0.060 0.160 0267 0.002) 0.008) woly (pia,ANSELIN AND GRIFFITH: SPATIAL EFFECTS IN REGRESSION ANALYSIS Ed TABLE 4. (Continued) > Tet we us L 3 OG nosy 27 asii (0.007) 10.014 (06 ap p.n30" 0.175 O76 (ounsy (0.01) ais) w 0.089) 0a 0.054 0.007) 6.006) cour Ls 10,006 ‘0.088 0.14 0.35K (0.002) (ooi7y jonny ola LMSHT 0.0% ies 0.134 0.354 «o.002) (0.007) coin ceouiss os 6 oss 272 0501 261 (007 wor wots oo15) BP 0.039 Onn 0.362 0s 2006) W012) worsy 0.416) w 4s) 6 0089 0.066 0.097) 007) «0073 (0.008) LMSH 027% ada) ‘ 1.926 ois W015) wdig, LMSHIT 0m 0,094 aS (0.008) (0.008) 10.0153 wg O14 aio 0,508 wary (wis) RP 138 O24 (01), (uray w Coan 1039 966 (0.006) ‘o07) (0.008) UMsit 0.977 09R4 85 (0.005) coun (4 UMSH-H 102 1.169 0.339) (@o10) wo1dy (1 (o.u04) “Gi denotes the Gileiscr test, BI? denotey the Breusch-Pagan test, W denotes the White test UMSH denotes the Lagrange maltpler (LM test on joint spatial (S) dependence and heteroske- dasticity (H1), and T MSH-H denotes the LMSH sequentially followed by a test for heteroskedasticity (CH). Estimated standard errors are in parentheses. TABLE 5. Rejection Frequencies for ‘Tests Against Heteruskedasticity in the Presence of Spatial Autocorrelation (N = 75; p = 0.05 for G, BP, W: p = 0.025 for LMSH, LMSH-H*) Tes nao Ww ' 3 ~09 G 0.064 oss 0,608 0770 coon ens 0.0155 O13) BP 0.087 aan a3? ‘0491 (a.on7) (014) @o16) 013) w 06. 0.085) 1.065 ‘oor ons) (0.00) (O.00%) @.00% Msi 880, 0913 0.955 0.969 oi (007) (0.005) LMSH-H 0034 0.408 0.564 (0.008) 16) o16) 05.6 00s 0632 0.816 0.007) coals, (0.012) BP 0.050) 333 0.728 (007) woie) (olay w 0.031 0.077 04097 0.008) 10.008) a) LMsu 0.278 0.676 0.785 wars (0.015) (oy LMSH-H 0,029 0.422 0.604 (0.008) (16) (oo1s)cy PAPERS OF THE REGIONAL SCIENCE. ASSOCIATION, VOL, 63, 198k » Test 1 3 “OG 0370 oer 0329 (outs) (W045) (only Be OAL 099 0743 oir 016) may, w 060 ‘0K 0.108 (0.008) 10.009 oni IMsit 9,130 0.432 0536 wp wos) (nie LMSILAT v0? 0.126 USIK (0.003) coon woisy aie an G ss 0.367 18S 0834 conn (wars, ous ap uae, 275 KO waar (aray wate, w 0 '¥,069 09 (h.006) 00K) «in.009) 6.010) Msi cK 0.006 0297 4x9 9d ea 4) G16 LMsiiat ‘008 oo 0288 aN? (0.003 6.00% couray 2016) ag 0.086, 0.¥70 0.688 0833 40,007) ais) ours 0.012) oP 040 27) 9X8 0734 10.006) wooy Wolo wold, w 0st oun 1097 0.105 10.006) ca008) woo» O10 Msi “1008 ‘UUs 0.282 D6) conn anne wooly one, IMSHAL p00 o9L 0.278 456 «o0025 0.00% cans «ute 0s G 11095 0387 aa oxy (eos waisy 95) wary BP 052 0286 11535 71a 2007 way wale noisy w 0a) OTe ‘0,098, 124 (2006) conn (o.n0% 010) Msi 462 Sst 0.690 u7% (OU16) conisy cours 0.3) UMSH-IS D028 0.157 1.369 S44 0.005) mony mors, cuter 09 G 139 0326 nase 504 ory 9015) wore «ater BP. 0.165 333 038K has ony wbiay fwb1sy wate w O02 03 ss ‘be (0.005) (0.006) DoT) 0.008) Msi 490 ‘guy 1.000) 10K woul (00) (0.000 LMSH-1T O11 0.199 TLR uot» anne wry wis) +6 denotes the Geyser tert, BP denotes the Brewseh Prgan test Wodenates the White test IMStL denotes the Lagrange muitipier (LM) test om joint spatial (Sp dependence and Ineterusk dasticity (1). and LMSH-H donates the LMSH sequentially followed! hy a Test for heteraskedast CH) Tstimaied standard errors are in parentieses change when spatial autocorrelation is present. In general, the effect of negative autocorrelation $ pronounced. On the other hand. a positive and large autocorrelution significantly decreases the power of both the G and BP tests. The combined I MSHI test has acceptable power when both heteroskedasticity and spatial autocorrelation are present, giving a strong indication of misspeci~ fication, and more so than the (raditionat tests (even at the lower nominal level).ANSELIN AND GRIFFITH: SPATIAL EFFECTS IN REGRESSION ANALYSIS, » However, as expected, the second stage is not very satisfactory. An alternative Procedure, which would explicitly take into account spatial autocorrelation, within the general LM testing approach outlined in Anselin (1988a) may be More attractive, although it would necessitate the estimation uf a more complex (and nonlinear} model Similar to the findings of the previous section, the simulation experiments presented here illustrate that inference based on traditional tests when spatial dependence is present but ignored can be highly misteading, 6 CONCLUDING REMARKS One of the main objectives of this paper was (o illustrate that ignoring spatial effects in applied regression analysis may lead to serious errors in the interpretation of familiar regression diagnostics and misspecification tests. ‘The results of the simple numerical experiments reported on in this paper clearly demonstrate that spatial cflects really do mutter in regression analysis, At this point in time, a considerable body of literature is available that describes techniques for handling spatial effects in applied regression analysis, However, there appcar to he several major obstacles hindering a more effective dissemination of these methods to the practice of regional science and geography. We feel that in order to achieve an effective and thorough dissemination number of important research issues need to be addressed. Among these we believe the following five are most crucial: (1) a more effective testing for the presence of spatial ellects in regression residuals, cither in isolation or in combination with other sources of mis- specification; (2) a more reliable interpretation of standard regression diagnostics inthe presence of spatial dependene (3) estimation techniques that are better able to handle spatial effects in reatistic data settings (small or large samptes, nonnormality, specification uncertainty): (4) a more effective integration into ckages of techniques for estimation in the presence of spatial effects; and (5) a more realistic and robust interpretation of levels of significance Presence of spatial effects (pretesting. nonparametrics). In order to attain these goals we feel that it is essential that the lack of cooperation between the efforts in spatial statistics and spatial econometrics should come to an end, Kor too long the developments in these two subields have occurred in parallel, rather than being complementary. We belicve that strong integrative effort would achieve an improved dialogue between researchers working in the areas of spatial statistics and spatial econometrics, thereby leading to further communication and effective cross-fertilization across disciplinary boundaries A secondary objective of this paper was to begin to provide some specific advice and guidance (o practitioners. The most important piece of advice ts that nthe ir face value. I advised to use classival criteria even as a first approximation. Moreover, the first step in analyzing, a spatial data series should be to assess the sources. nature, und degree of prevailing spatial effects, If the magnitudes of these effects appear to be negligible, then output from standard commerical packages should offer reasonable first approximations, If these effects are severe, however, then the researcher must undertake a more30 PAPERS OP THE REGIONAL SCIENCE ASSOCIATION, VOL. 0S, 1988 sophisticated modeling strategy. Unfortunately most appli currently are not technically prepared to pursue this specific path. Beyond these points, developing comprehensive and detailed advice, and useful guidance, are goals of future joint research efforts. Making the necessary technology more accessible is another one of our sims. This paper represents a first step in these directions. ACKNOWLEDGMENTS, Part of the research upon which this paper is based is supported through grant SES-R600465 from the National Science Foundation. 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