Perspectives on spatial econometrics: Linear smoothing with structured models

Though standard spatial econometric models may be useful for specification testing, they rely heavily on a parametric structure that is highly sensitive to model misspecification. The commonly used spatial AR model is a form of spatial smoothing with a structure that closely resembles a semiparametric model. Nonparametric and semiparametric models are generally a preferable approach for more descriptive spatial analysis. Estimated population density functions illustrate the differences between the spatial AR model and nonparametric approaches to data smoothing. A series of Monte Carlo experiments demonstrates that nonparametric predicted values and marginal effect estimates are much more accurate then spatial AR models when the contiguity matrix is misspecified.