The exact bias of s(2) in linear panel regressions with spatial autocorrelation

We investigate the OLS-based estimator s(2) of the disturbance variance in an error component linear panel regression model when the disturbances are homoskedastic, but spatially correlated. Although consistent (Song and Lee, Econ. Lett. 2008), s(2) can be arbitrarily biased towards zero in finite samples. (C) 2010 Elsevier B.V. All rights reserved.