What Can We Learn from Nighttime Lights for Small Geographies? Measurement Errors and Heterogeneous Elasticities

Abstract

Nighttime lights are routinely used as a proxy for economic activity when official statistics are unavailable and are increasingly applied to study the effects of shocks or policy interventions at small geographic scales. The implicit assumption is that the ability of nighttime lights to pick up changes in GDP does not depend on local characteristics of the region under investigation or the scale of aggregation. This study uses panel data on regional GDP growth from six countries, and nighttime lights from the Defense Meteorological Satellite Program (DMSP) to investigate potential nonlinearities and measurement errors in the light production function. Our results for high statistical capacity countries (the United States and Germany) show that nightlights are significantly less responsive to changes in GDP at higher baseline level of GDP, higher population densities, and for agricultural GDP. We provide evidence that these nonlinearities are too large to be caused by differences in measurement errors across regions. We find similar but noisier relationships in other high-income countries (Italy and Spain) and emerging economies (Brazil and China). We also present results for different aggregation schemes and find that the overall relationship, including the nonlinearity, is stable across regions of different shapes and sizes but becomes noisier when regions become few and large. These findings have important implications for studies using nighttime lights to evaluate the economic effects of shocks or policy interventions. On average, nighttime lights pick up changes in GDP across many different levels of aggregation, down to relatively small geographies. However, the nonlinearity we document in this paper implies that some studies may fail to detect policy-relevant effects in places where lights react little to changes in economic activity or they may mistakenly attribute this heterogeneity to the treatment effect of their independent variable of interest.