EC3SLS Estimator for a Simultaneous System of Spatial Autoregressive Equations with Random Effects∗

This paper derives a 3SLS estimator for a simultaneous system of spatial autoregressive equations with random effects which can therefore handle endoegeneity, spatial lag dependence, heterogeneity as well as cross equation correlation. This is done by utilizing the Kelejian and Prucha (1998) and Lee (2003) type instruments from the cross-section spatial autoregressive literature and marrying them to the error components 3SLS estimator derived by Baltagi (1981) for a system of simultaneous panel data equations. Our Monte Carlo experiments indicate that, for the single equation spatial error components 2SLS estimators, there is a slight gain in effi ciency when Lee (2003) type rather than Kelejian and Prucha (1998) instruments are used. However, there is not much difference in effi ciency between these instruments for spatial error components 3SLS estimators.