Estimating individual effects and their spatial spillovers in linear panel data models: Public capital spillovers after all?

Individual-specific effects and their spatial spillovers are not generally identified in linear panel data models. In this paper we present identification conditions under the assumption that covariates are correlated with the individual-specific effects and derive appropriate GLS and IV estimators for the resulting correlated random effects spatial panel data model. We also illustrate the proposed estimators using a Cobb-Douglas production function specification and US state-level data from Munnell (1990). As in previous studies, we find no evidence of public capital spillovers. However, public capital does play a role in the positive “outwards” spatial contagion of the individual effects.