Abstract
Hedonic regressions with house value as the dependent variable are widely used to study the value of public services and This paper builds on the theory of household bidding and sorting to derive a bid function envelope, which provides a form for these regressions. This approach uses a general characterization of household heterogeneity, yields estimates of the price elasticities of demand for services and amenities directly from the hedonic with no need for a Rosen two-step procedure, and provides tests of key hypotheses about household sorting. An application to data from Cleveland in 2000 yields precise estimates of price elasticities for school quality, distance from environmental hazards, and neighborhood ethnic composition. The results support the sorting hypotheses and indicate that household preferences are very heterogeneous, with some households placing a negative value on many amenities.
Highlights
IntroductionHouse-value regressions, called hedonic regressions, are one of the central empirical tools of urban economics and local public finance
House-value regressions, called hedonic regressions, are one of the central empirical tools of urban economics and local public finance. This tool has been used to study a wide range of topics, including the willingness to pay for public services, the willingness to pay for environmental quality, the impact of property taxes on housing markets, the trade-off between housing and commuting costs, and racial prejudice and discrimination
This step leads to bid functions that can be incorporated into house value regressions and estimated
Summary
House-value regressions, called hedonic regressions, are one of the central empirical tools of urban economics and local public finance. The main purpose of this paper is to bring the conceptual and empirical literatures on these topics closer together by introducing the logic of bid functions directly into the specification of a house-value regression. This approach makes it possible to test some basic tenets of bid-function theory, facilitates consideration of household heterogeneity, and leads to direct estimation of amenity demand elasticities. The functional form I derive can accommodate many different public services and amenities, as well as commuting costs and local taxes This derivation reveals that the service/amenity and housing price elasticities appear directly in bid functions and can be estimated with a one-step hedonic procedure
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