Henk Folmer
University of Groningen

We analyze household preferences for piped water in urban Indonesia by means of a hedonic house price (HP) model. Based on the three-waves, longitudinal data set of the Indonesia Family Life Survey (IFLS), the HP model is estimated by means of a constrained autoregressive – structural equations modeling (SEM) approach. Constrained autoregression mitigates bias due to omitted explanatory variables while SEM, by controlling for measurement errors in explanatory variables, reduces attenuation bias. Furthermore, it reduces multicollinearity. We find that households are willing to pay (WTP) approximately 8% of their monthly expenditures for piped water which exceeds WTP estimates obtained by standard HP methods applied to the same data set. We indicate how the WTP estimate obtained in this paper can be used for domestic water provision policy in Indonesia.