Confronting Price Endogeneity in a Duration Model of Residential Subdivision Development

Abstract

SummarySpatial equilibrium implies that distant factors are correlated with local prices through market mechanisms. Using this logic, we develop a novel approach for handling price endogeneity in land use models. We combine a control function approach with a duration model to identify the impact of prices in influencing land conversion. We find that failure to control for endogeneity results in large differences in elasticities. Specifically, we find an elasticity of 2.06 compared to 0.67 in a model without instrumentation. This difference is significant as it suggests that price‐based policies, such as ‘green taxes’, are likely more effective in altering development patterns than would be expected from a naïve estimation that ignores price endogeneity. Copyright © 2016 John Wiley & Sons, Ltd.