The paper considers a Cliff–Ord type spatial model with a spatially lagged dependent variable and a row normalized weighting matrix with equal weights. We show that the 2SLS and OLS estimators are inconsistent unless panel data are available. The weighting matrix in question is one which would naturally be considered if all units are neighbors to each other, and there is no other reasonable or observable measure of distance between them.
2SLS and OLS in a Spatial Autoregressive Model with Equal Spatial WeightsHarry H. Kelejian and Ingmar Prucha ,
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Regional Science and Urban Economics