Spatial dynamic game models for coevolution of intertemporal economic decision-making and spatial networks

Keywords Forward-looking agents; Spatial dynamic panel data model; Endogenous networks; Euler equations; GMM Estimation; U.s. states' public welfare expenditure Abstract This paper introduces a spatial panel data model describing local agents' intertemporal decision-making with their network interactions and network evolution. Our model's purpose is to give a tool to analyze local governments' behaviors when there exist network interactions among them with endogenously changing networks. To provide a theoretical foundation of our model, we establish a network interaction model for forward-looking agents. An agent's current action can affect his future network links via time-varying economic indicators. To estimate the model's parameters, we consider a GMM estimation method based on first-order conditions of agents' approximated lifetime problems. Asymptotic properties of the GMM estimator are studied for statistical inferences. Using our model, we find evidence of positive spillovers among U.S. states' public welfare expenditures with coevolution between them and spatial-economic networks. Author Affiliation: Department of Economics, The Ohio State University, 1945 N. High Street,Columbus, Ohio * Corresponding author. Article History: Received 13 October 2020; Revised 25 April 2021; Accepted 18 June 2021 (footnote)[white star] We thank Thomas A. Lubik (Editor) and anonymous referees for their great suggestions that substantially improve our paper. We would like to thank Professors Jason Blevins, Chi-Young Choi, Stephen Cosslett, Adam Dearing, Robert de Jong, Chih-Sheng Hsieh, Fei Jin, Yongcheol Shin, Bruce Weinberg, and Huanxing Yang for their valuable comments and suggestions. Hanbat thanks his graduate colleagues Jinsoo Bae, Minhae Kim, Nayul Kim, Sungjoon Kwon, Soyoung Lee, and Jon Michel. Also, we thank seminar participants at National Taiwan University and the audience from the 2019 Asian Meeting in Xiamen University, Xiamen, China; the 2019 North American Summer Meeting in University of Washington, Seattle; U.S, the 2019 European Summer Meeting in University of Manchester, U.K; and the 29th Annual Meeting of the Midwest Econometrics Group at the Ohio State University for comments. Byline: Hanbat Jeong [jeong.181@osu.edu] (*,a), Lung-fei Lee [lee.1777@osu.edu] (a)