An alternative to the standard spatial econometric approaches in hedonic house price models
AbstractHedonic models are subject to spatially correlated errors which are a symptom of omitted spatial variables, mis-speciﬁcation or mismeasurement. Methods have been developed to address this problem through the use of spatial econometrics or spatial ﬁxed eﬀects. However, often spatial correlation is modeled without much consideration of the theoretical implications of the chosen model or treated as a nuisance to be dealt with holding little interest of its own. We discuss the limitations of current standard spatial approaches and demonstrate, both empirically and theoretically the generalized additive model as an alternative. The generalized additive model is compared with the spatial error model and the ﬁxed effects model. We ﬁnd the generalized additive model to be a solid alternative to the standard approaches, having less restrictive assumptions about the omitted spatial processes while still being able to reduce the problem of spatial autocorrelation and provide trustworthy estimates of spatial variables. However, challenges connected with spatially varying data remain. The choice of ﬂexibility in the spatial structure of the model affects estimated parameters of some spatially varying characteristics markedly. This suggests that omitted variable bias may remain an important problem. We advocate for an increased use of sensitivity analysis to determine robustness of estimates to different models of the (omitted) spatial processes.
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Bibliographic InfoPaper provided by University of Copenhagen, Department of Food and Resource Economics in its series IFRO Working Paper with number 2013/18.
Length: 33 pages
Date of creation: Oct 2013
Date of revision:
hedonic valuation; spatial econometrics; generalized additive model;
Find related papers by JEL classification:
- Q51 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Valuation of Environmental Effects
- R30 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location - - - General
- R52 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Regional Government Analysis - - - Land Use and Other Regulations
This paper has been announced in the following NEP Reports:
- NEP-ALL-2013-11-09 (All new papers)
- NEP-GEO-2013-11-09 (Economic Geography)
- NEP-URE-2013-11-09 (Urban & Real Estate Economics)
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