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Revisiting the hedonic price method to assess the implicit price of environmental quality with market segmentation

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  • Marc Baudry
  • Masha Maslianskaia-Pautrel

Abstract

The article highlights the role of heterogeneity in the formation of hedonic prices. The article distinguishes between continuous and groupwise heterogeneity. The distinction helps understanding two important points. First, the analysis of market equilibrium with groupwise heterogeneity makes explicit the role of participation and incentives compatibility constraints for groups of buyers. The case of continuous heterogeneity may be thought of as a limit case of groupwise heterogeneity when the number of groups goes to infinity and their masses go to zero. The hedonic price curve is then obtained as the solution of a differential equation resulting from a market clearing condition. Second, the article outlines that submarkets emerge from market equilibrium only in the case of groupwise heterogeneity. The existence of submarkets means that the hedonic price function is continuous but the implicit price of characteristics is discontinuous at endogenous threshold values separating submarkets. Major implications for the valuation of environmental quality follow on. Based on numerical simulations, the article gives some insights into the way significant biases and drawbacks in the estimation of the implicit price of environmental quality can arise if the usual two steps procedure is implemented.

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Bibliographic Info

Paper provided by University of Paris West - Nanterre la Défense, EconomiX in its series EconomiX Working Papers with number 2012-45.

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Length: 58 pages
Date of creation: 2012
Date of revision:
Handle: RePEc:drm:wpaper:2012-45

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Keywords: Environmental valuation; discrete heterogeneity; hedonicmodeling; vertical differentiation;

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  1. Ivar Ekeland & James J. Heckman & Lars Nesheim, 2003. "Identification and Estimation of Hedonic Models," CESifo Working Paper Series 1031, CESifo Group Munich.
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Cited by:
  1. Masha Maslianskaia-Pautrel, 2013. "Hedonic model with discrete consumer heterogeneity and horizontal differentiated housing," CEEES Paper Series CE3S-03/13, European University at St. Petersburg, Department of Economics.
  2. Masha Maslianskaia-Pautrel, 2013. "Hedonic model of segmentation with horizontal differentiated housing," Working Papers halshs-00856127, HAL.

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