Spillover externalities can be explained as influences of the prices of neighboring properties on the price of a given one. Suppose there is a price change or changes in the amenity levels in a neighborhood. The effect of this change would be experienced by properties in a close proximity and the prices of the properties in close proximity might help explain the price of the property of interest. In the context of welfare valuation, this feature of spatial price interdependence or spillover effects has only recently received attention. Spatial lag models are one of the many spatial econometric methods used to capture spatial interdependence effects in real estate data. The ability to capture the influences of the not so easily observed variables allows spatial lag models to measure the direct (pecuniary) and indirect (technological effects ) spillover effects. The direct effect measures the value of the property in question and the indirect captures the influences of neighboring properties, through a spatial multiplier effect. This study addresses three research gaps in relation to spillover externalities.
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