Estimation of spatial autoregressive models with boundary specification problem

This article examines the impact of the boundary specification problem upon the estimation of spatial autoregressive models within an instrumental variable (IV) framework. We show the usual IV estimator remains consistent and asymptotically normal, but incurs an asymptotic bias of order O-p(n(2)/nu), where n(2) is the number of boundary units and nu is the total sample size. Our results show some promise for IV based inference even in the presence of the boundary problem. (C) 2012 Elsevier B.V. All rights reserved.