Exercise 3.2 Show that a Spatial Error model yi = b Xi + ui ; < =1 =1 = + ; 1 n

Exercise 3.2 Show that a Spatial Error model yi = b Xi + ui ;

<

Σ

Σ

=1

=1

= + ; 1 n

j ij j i n i j ij w u u

w r e r ; ei n.i.d N(0,σe2 ) can be expressed as a Spatial Lag model with an additional spatially lagged independent variable. Explain why, even if the error term e is “well-behaved”, the OLS criterion does not provide reliable estimators for the unknown parameters.