Spatial hedonic pricing models for the valuation of irrigation water

Abstract

The main objective of this work is to apply the hedonic pricing method using the methodology of spatial econometrics in order to assess the economic value of irrigation water, as one of the individual attributes of the value of agricultural land parcels. Most of the agricultural land's value attributes, like neighbor characteristics as well as the availability of irrigation water, exhibit a spatial variability. This means that the application of a conventional hedonic pricing model, which is based on the assumption of spatial stationarity, may be inefficient and probably introduce bias in the estimation of several parameters. In fact, the spatial effect, and in particular the spatial dependence is a determinant of the efficiency and consistency of the hedonic model. Therefore, two spatial hedonic pricing models and a conventional one are formulated and implemented. Spatial dependence is incorporated in the modeling in two ways: a) by including a spatially lagged dependent variable (spatial lag model) and b) by including the spatial dependence of the error term (spatial error model). The two spatial econometric models together with a conventional model of multiple regression are applied in a typical rural area of Greece. A key feature of the proposed approach is that a GIS analysis of land parcels is a basic component of the modeling procedure. Results from this application show that the spatial methods increase the efficiency and consistency and reduce the bias of the parameter estimates. Moreover, the spatial error model provides better results and it is, therefore, preferred in order to estimate the value of irrigation water. Copyright © 2009 Global NEST.