Abstract
An anomalous result in the empirical literature on residential property values has been the inability to measure the capitalization of negative neighborhood externalities using disaggregate data. This result has persisted, with few exceptions, across data sets and across definitions of externality and neighborhood.’ This paper argues that the literature may have misspecified the theoretical relationship between residential property values and neighborhood externalities and that this could explain the lack of observed capitalization. A new specification is proposed and given a preliminary test. The conventional literature on neighborhood externalities can be summarized by the hedonic price equation,
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