Economic activities are fundamentally influenced by their location in space, which
determines the physical and natural environment in which they take place. Likewise,
location defines the social context of economic activity prescribing the particular
laws, regulations and social norms to which it should conform. Moreover, spatial
location defines proximity, which shapes the costs of accessing factor inputs, product
markets and other economic and social institutions. In fact, spatial location mediates
most forms of interaction, intended and unintended, that may arise from
communication and connections between economic agents. These spatial processes
have important implications for estimation, policy evaluation and prediction in
models of economic activity.
This thesis is comprised of two parts. Part I presents a broad range of issues that
arise in estimation due to space and frames these as general spatial omitted variables.
I explore the use of semi-parametric estimators to identify the parameters of interest
in this general model and derive identification conditions for fixed and local adaptive
spatial smoothing estimators. The properties of these estimators are contrasted to
OLS and spatial econometric estimators.
Part II addresses issues in policy evaluation and prediction. I derive an equilibrium
sorting model with endogenous tenure choice that can be used to evaluate the general
equilibrium welfare effects of policies that affect local environmental quality. Using
a series of simulations, motivated by a real world policy application, I contrast the
welfare changes derived under this model to a conventional static approach. By
allowing for rental and purchase markets the model I develop provides a far richer
characterisation of the complex adjustments that propagate through the property
market following policy changes and the contrary impact such policies can have
upon renters and owners. The usefulness of the model for applied policy analysis is
demonstrated through two applications: The Polegate Bypass and Mortgage Interest
Deduction reform
