Spatial autocorrelation or model misspecification? The help from RESET and the curse of small samples

• Abstract

  In regression analysis,model misspecification can produce spurious spatial correlation in the residuals. By means of Monte Carlo simulations, I show that the RESET test can help to disentangle this conundrum in large samples. Small samples can pose a serious challenge to finding the correct model.

• Keywords

  Spatial autocorrelation, Model misspecification, RESET, Monte Carlo simulations

• JEL classification

  R12, C12, C15, R15, C21

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  Spatial autocorrelation or model misspecification? The help from RESET and the curse of small samples