Errors in variables and spatial effects in hedonic house price models of ambient air quality

  • Luc AnselinEmail author
  • Nancy Lozano-Gracia
Part of the Studies in Empirical Economics book series (STUDEMP)

In the valuation of the effect of improved air quality through the estimation of hedonic models of house prices, the potential “errors in variables” aspect of the interpolated air pollution measures is often ignored. In this paper, we assess the extent to which this may affect the resulting empirical estimates for marginal willingness to pay (MWTP), using an extensive sample of over 100,000 individual house sales for 1999 in the South Coast Air Quality Management District of Southern California. We take an explicit spatial econometric perspective and account for spatial dependence and endogeneity using recently developed Spatial 2SLS estimation methods. We also account for both spatial autocorrelation and heteroskedasticity in the error terms, using the Kelejian—Prucha HAC estimator. Our results are consistent across different spatial weights matrices and different kernel functions and suggest that the bias from ignoring the endogeneity in interpolated values may be substantial.


Spatial econometrics Hedonic models HAC estimation Endogeneity Air quality valuation Real estate markets 


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© Physica-Verlag Heidelberg 2009

Authors and Affiliations

  1. 1.School of Geographical SciencesArizona State UniversityTempeUSA
  2. 2.Spatial Analysis Laboratory (SAL) and Department of Agricultural and Consumer EconomicsUniversity of Illinois, Urbana-ChampaignUrbanaUSA

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