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Selecting the W Matrix: Parametric vs. Non Parametric Approaches

Mur Lacambra, Jesús and Herrera Gómez, Marcos and Ruiz Marin, Manuel (2013): Selecting the W Matrix: Parametric vs. Non Parametric Approaches.

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In spatial econometrics, it is customary to specify a weighting matrix, the so-called W matrix, by choosing one matrix from a finite set of matrices. The decision is extremely important because, if the W matrix is misspecified, the estimates are likely to be biased and inconsistent. However, the procedure to select W is not well defined and, usually, it reflects the judgments of the user. In this paper, we revise the literature looking for criteria to help with this problem. Also, a new nonparametric procedure is introduced. Our proposal is based on a measure of the information, conditional entropy. We compare these alternatives by means of a Monte Carlo experiment.

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