Spatial Aggregation Bias in Implicit Prices of Environmental Amenities

Applications of hedonic price functions aimed at eliciting implicit prices of environmental goods generally rely on spatially aggregated measures to proxy for micro-level perceptions of these amenities. This paper provides empirical evidence of the bias that arises in the elicitation of these implicit prices due to spatial aggregation. Cross-sectional data on more than 12,000 rental homes is used to derive implicit prices of air quality, using households' perceptions of air pollution aggregated at different spatial levels. Results show that higher aggregation levels add a downward bias to marginal willingness-to-pay measures for air quality improvements, increasing point estimates of the price of air quality. These findings suggest caution when interpreting implicit prices elicited from spatially aggregated measures of environmental amenities.