A Brief Introduction to Spatial

Econometrics

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•Spatial econometrics is a blanket term for statistical tests
and models used to address potential issues introduced by
the presence of spatial effects in regression analysis.
•There is a distinction between regression models that are
spatial in nature and a spatial econometric regression models
•However, both groups of models can be said to be spatially
explicit…in terms of any of the four tests.
•Three spatial effects:
spatial lag dependence
spatial error dependence
spatial heterogeneity

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A ‘Hedonic’ Example

What are the determinants of the price of a house?

Price = Sq. ft. + Age + Median Income +

Dist. to Metro + error

error captures all the determinants that you can’t think of, can’t
model or measure correctly, or don’t have data to measure.

Much of the research has used to hedonic models of residental parcel

transactions to quantify some of the direct benefits to property owners of open
space. Infact, the majority of the work out of UMD has used hedonic
modeling.

The advantage of the hedonic modeling approach is that it is a market-based

reveled preference (as opposed to stated preference, such as ContVal).

My analysis will be focusing on marginal changes. I have proposed a hedonic

model of residential parcel transactions on ~10,000 observations from Oct
1996 through September 1998.

Explain the model’s components—spatial error model, especially school

district

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 Spatial Lag Dependence

How do property appraisers determine the value of a property?

Price = W * Price + Sq. ft. + Age + Median Income +

Dist. to Metro + error

Where W is a spatial weight matrix

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 Spatial Error Dependence

Recall that the regression model contains an error term

Spatial dependence can occur when:
1) Spatially correlated omitted variables
2) Spatially correlated aggregate variables
3) Spatially correlated errors in variable measurement

It can be accounted for by the spatial error model:

Price = Sq. ft. + Age + Median Income +
Dist. to Metro + error
error = W*error + µ

To correct for spatial dependence we specify a model where the error term is
made up of two zero-mean components

In spatial econometrics, the choice of spatial weight matrix is often made ad

hoc and a priori.

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 Spatial Weight Matrix

•Provides the ‘structure’ of assumed spatial relationships.

•Recall from before that the price of a house was hypothesized
to be a function of a weight average of the prices of the
surrounding houses, among other things.

•Weight Matrix contains a ‘d’ term

for every combination of È0 d12 d13 ˘
observations in the data set Íd 0 d 23 ˙˙
Í 21
•‘d’ may be the inverse distance ÍÎd 31 d 32 0 ˙˚
between observations or 0,1 if they
share a border and/or vertex.

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 Block or Subdivision
Spatial Weight Matrix

What types of weight matrices are typical for hedonic models and what type do
I want to use.

The first is distance, the second is contiguity

Row standardization does not change the relative dependence among

neighbors, but it does change the total impact of neighbors across
observations

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 300 meter or 600 meter
Spatial Weight Matrix

What types of weight matrices are typical for hedonic models and what type do
I want to use.

The first is distance, the second is contiguity

Row standardization does not change the relative dependence among

neighbors, but it does change the total impact of neighbors across
observations

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 Spatial Heterogeneity

•Is there any reason to suspect that the value of an additional

100 square foot of residential space cost the same
everywhere? Perhaps the value varies with neighborhood?
•You could take a dummy variable approach:

Price = Sq. ft. + Age + Median Income +

Dist. to Metro + Distance to DC + error

•But this only accounts for the premium of living in near DC.

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 Spatial Heterogeneity

•A better representation is to allow the parameters of the

model to vary across space…thus accounting for spatial
heterogeneity.

Price = Sq. ft. + (Sq. ft. *Distance to DC) +

Age + Median Income + Dist. to Metro + error

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