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Estimation of nonlinear functions using coarsely discrete measures in panel data: The relationship between land prices and earthquake risk in the Tokyo Metropolitan District

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  • Gu, Tao
  • Nakagawa, Masayuki
  • Saito, Makoto
  • Yamaga, Hisaki

Abstract

This paper proposes a simple method to estimate a nonlinear function using only coarsely discrete explanatory variables in panel data. The basic premise is to distinguish carefully between two types of discrete variables by assuming that if the variable changes between two points in time, it increases (decreases) marginally from near the upper (lower) bound one rank below (above). The dynamic pricing behavior at the boundary between two consecutive ranks is then properly approximated. Applying the proposed method, we estimate the nonlinear relationship between land prices and earthquake risk, with the latter being assessed over only five ranks. The panel datasets used comprise some two thousand fixed places over time in the Tokyo Metropolitan District. We interpret the estimated nonlinear land pricing functions using prospect theory from behavioral economics.

Suggested Citation

  • Gu, Tao & Nakagawa, Masayuki & Saito, Makoto & Yamaga, Hisaki, 2021. "Estimation of nonlinear functions using coarsely discrete measures in panel data: The relationship between land prices and earthquake risk in the Tokyo Metropolitan District," Discussion Paper Series 729, Institute of Economic Research, Hitotsubashi University.
    • Handle: RePEc:hit:hituec:729
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    References listed on IDEAS

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    More about this item

    JEL classification:

    • R14 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General Regional Economics - - - Land Use Patterns
    • R30 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location - - - General
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making

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