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

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  • Luc Anselin
  • Nancy Lozano-Gracia

Abstract

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.
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Suggested Citation

  • Luc Anselin & Nancy Lozano-Gracia, 2008. "Errors in variables and spatial effects in hedonic house price models of ambient air quality," Empirical Economics, Springer, vol. 34(1), pages 5-34, February.
    • Handle: RePEc:spr:empeco:v:34:y:2008:i:1:p:5-34
    DOI: 10.1007/s00181-007-0152-3
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    References listed on IDEAS

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    1. V. Smith & Ju Huang, 1993. "Hedonic models and air pollution: Twenty-five years and counting," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 3(4), pages 381-394, August.
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    More about this item

    Keywords

    Spatial econometrics; Hedonic models; HAC estimation; Endogeneity; Air quality valuation; Real estate markets; C21; Q51; Q53; R31;
    All these keywords.

    JEL classification:

    • C21 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Cross-Sectional Models; Spatial Models; Treatment Effect Models
    • Q51 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Valuation of Environmental Effects
    • Q53 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Air Pollution; Water Pollution; Noise; Hazardous Waste; Solid Waste; Recycling
    • R31 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location - - - Housing Supply and Markets

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