Original Paper

Empirical Economics

, Volume 34, Issue 1, pp 5-34

First online:

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

  • Luc AnselinAffiliated withSchool of Geographical Sciences, Arizona State University Email author 
  • , Nancy Lozano-GraciaAffiliated withSpatial Analysis Laboratory (SAL) and Department of Agricultural and Consumer Economics, University of Illinois, Urbana-ChampaignSchool of Geographical Sciences, Arizona State University

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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

JEL Classification

C21 Q51 Q53 R31