Intensive vs extensive margin tradeoffs in a simple monetary search model 

Abstract

This paper examines the consequences of model misspecification using a panel data model with spatially autocorrelated disturbances. The performance of several maximum likelihood estimators assuming different specifications for this model are compared using Monte Carlo experiments. These include (i) MLE of a random effects model that ignore the spatial correlation; (ii) MLE described in Anselin [1988] which assumes that the individual effects are not spatially autocorrelated; (iii) MLE described in Kapoor, et al. [2006] which assumes that both the individual effects and the remainder error are governed by the same spatial autocorelation; (iv) MLE described in Baltagi, et al. [2006] which allows the spatial correlation parameter for the individual effects to be different from that of the remainder error term. The latter model encompasses the other models and allows the researcher to test these specifications as restrictions on the general model using LM and LR tests. In fact, based on these tests, we suggest a pretest estimator which is shown to perform well in Monte Carlo experiments, ranking a close second to the true MLE in mean squared error performance.