Estimation of spatial weights matrix in a spatial error model, with an application to diffusion in housing demand

Abstract

This paper proposes a methodology for estimation of spatial weights matrices which are consistent with a given or estimated pattern of spatial autocovariance. This approach is potentially useful for applications in urban, environmental, development, growth and other areas of economics where there is uncertainty regarding the nature or spatial (or cross-sectional) interaction between regions (or economic agents). The proposed methodology is applied to housing markets in England and Wales and several new hypotheses are advanced about the social and economic forces that determine spatial diffusion in housing demand