Locally adjusted LM test for spatial dependence in fixed effects panel data models

Lee and Yu (2010) propose spatial panel data models with one-way and two-way fixed effects. Debarsy and Ertur (2010) construct LM (Lagrange multiplier) and LR (likelihood ratio) tests in the one-way fixed effects model. He and Lin (2012) derive LM tests in the two-way fixed effects model. To guard against possible local misspecification, in this paper we apply Bera and Yoon (1993) principle, and construct locally adjusted (robust) LM tests for spatial dependence in both one-way and two-way fixed effects models. Monte Carlo experiment is carried out to show the advantage of using robust LM tests over the corresponding marginal and conditional versions.