Under the hood Issues in the specification and interpretation of spatial regression models

This paper reviews a number of conceptual issues pertaining to the implementation of an explicit “spatial” perspective in applied econometrics. It provides an overview of the motivation for including spatial effects in regression models, both from a theory‐driven as well as from a data‐driven perspective. Considerable attention is paid to the inferential framework necessary to carry out estimation and testing and the different assumptions, constraints and implications embedded in the various specifications available in the literature. The review combines insights from the traditional spatial econometrics literature as well as from geostatistics, biostatistics and medical image analysis.