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A multivariate spatial autoregressive model of local public expenditure determination with autoregressive disturbance is developed and estimated in this paper. The empirical model is developed on the principles of utility maximization of a strictly quasi concave community utility function. The existence of spatial interdependence is tested using Moran’s I statistic and Lagrange Multiplier test statistics for both the spatial error and spatial lag models. The full model is estimated by efficient GMM following Kelejian and Prucha’s (1998) approach using county-level data from 418 Appalachian counties. The results indicate the existence of significant spillover effects among local governments with respect to spending in local public services. The OLS estimates of the conventional (non spatial) model of local public expenditure determination and the corresponding maximum likelihood estimates of the spatial lag and the spatial error models are also presented for comparison purposes. The GMM estimates are found to be more efficient.