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Identifying Hedonic Models

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  • Ivar Ekeland
  • James J. Heckman
  • Lars Nesheim

Abstract

Economic models for hedonic markets characterize the pricing of bundles of attributes and the demand and supply of these attributes under different assumptions about market structure, preferences and technology. (See Jan Tinbergen, 1956, Sherwin Rosen, 1974 and Dennis Epple, 1987, for contributions to this literature). While the theory is well formulated, and delivers some elegant analytical results, the empirical content of the model is under debate. It is widely believed that hedonic models fit in a single market are fundamentally underidentified and that any empirical content obtained from them is a consequence of arbitrary functional form assumptions. The problem of identification in hedonic models is a prototype for the identification problem in a variety of economic models in which agents sort on unobservable (to the economist) characteristics: models of monopoly pricing (Michael Mussa and Sherwin Rosen, 1978; Robert Wilson, 1993) and models for taxes and labor supply (James Heckman, 1974). Sorting is an essential feature of econometric models of social interactions. (See William Brock and Steven Durlauf, 2001). In this paper we address the sorting problem in hedonic models. Nesheim (2001) extends this analysis to a model with peer effects. In this paper we note that commonly used linearization strategies made to simplify estimation and justify the application of instrumental variables methods, produce identification problems. The hedonic model is generically nonlinear. It is the linearization of a fundamentally nonlinear model that produces the form of the identification problem that dominates discussion in the applied literature. Linearity is an arbitrary and misleading functional form when applied to empirical hedonic models. Our research establishes that even though sorting equilibrium in a single market implies no exclusion restrictions, the hedonic model is generically nonparametrically identified. Instrumental variables and transformation model methods

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Bibliographic Info

Article provided by American Economic Association in its journal American Economic Review.

Volume (Year): 92 (2002)
Issue (Month): 2 (May)
Pages: 304-309

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Handle: RePEc:aea:aecrev:v:92:y:2002:i:2:p:304-309

Note: DOI: 10.1257/000282802320189447
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References

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  1. Ivar Ekeland & James Heckman & Lars Nesheim, 2002. "Identification and estimation of hedonic models," CeMMAP working papers CWP07/02, Centre for Microdata Methods and Practice, Institute for Fiscal Studies.
  2. Mussa, Michael & Rosen, Sherwin, 1978. "Monopoly and product quality," Journal of Economic Theory, Elsevier, vol. 18(2), pages 301-317, August.
  3. Wilson, Robert, 1997. "Nonlinear Pricing," OUP Catalogue, Oxford University Press, number 9780195115826.
  4. James N. Brown & Harvey S. Rosen, 1982. "On the Estimation of Structural Hedonic Price Models," NBER Technical Working Papers 0018, National Bureau of Economic Research, Inc.
  5. William Brock & Steven N. Durlauf, 2000. "Interactions-Based Models," NBER Technical Working Papers 0258, National Bureau of Economic Research, Inc.
  6. James J. Heckrnan, 1974. "Effects of Child-Care Programs on Women's Work Effort," NBER Chapters, in: Economics of the Family: Marriage, Children, and Human Capital, pages 491-524 National Bureau of Economic Research, Inc.
  7. Heckman, James J, 1974. "Effects of Child-Care Programs on Women's Work Effort," Journal of Political Economy, University of Chicago Press, vol. 82(2), pages S136-S163, Part II, .
  8. Epple, Dennis, 1987. "Hedonic Prices and Implicit Markets: Estimating Demand and Supply Functions for Differentiated Products," Journal of Political Economy, University of Chicago Press, vol. 95(1), pages 59-80, February.
  9. Rosen, Sherwin, 1974. "Hedonic Prices and Implicit Markets: Product Differentiation in Pure Competition," Journal of Political Economy, University of Chicago Press, vol. 82(1), pages 34-55, Jan.-Feb..
  10. Kahn, Shulamit & Lang, Kevin, 1988. "Efficient Estimation of Structural Hedonic Systems," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 29(1), pages 157-66, February.
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