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Hedonism vs. Nihilism: No Arbitrage and Tests of Urban Economic Models

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Author Info
Marcus Berliant (Washington University in St. Louis)
Daniel P. McMillen (University of Illinois at Chicago)

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Abstract

We present two notions of “no arbitrage” in urban economic models and show that there is no model satisfying both. The standard hedonic housing model of urban economics and its generalizations are consistent with the first of these, but inconsistent with the second. We present a model consistent with the second notion of “no arbitrage” and a continuum of models consistent with neither notion that are observationally equivalent to the standard model, even if the utility function of consumers is known. Only one of these is the standard model. Thus, the available tests of the standard model cannot provide much evidence of its validity. Finally, we examine nonlinear price systems consistent with the second notion of "no arbitrage" and their welfare consequences.

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File URL: http://129.3.20.41/eps/urb/papers/0407/0407012.pdf
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Publisher Info
Paper provided by EconWPA in its series Urban/Regional with number 0407012.

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Length: 19 pages
Date of creation: 29 Jul 2004
Date of revision: 16 Feb 2005
Handle: RePEc:wpa:wuwpur:0407012

Note: Type of Document - pdf; pages: 19
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Web page: http://129.3.20.41

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Related research
Keywords: Monocentric City; Hedonic Models; No Arbitrage;

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Find related papers by JEL classification:
R21 - Urban, Rural, and Regional Economics - - Household Analysis - - - Housing Demand
R13 - Urban, Rural, and Regional Economics - - General Regional Economics - - - General Equilibrium and Welfare Economic Analysis of Regional Economies
D41 - Microeconomics - - Market Structure and Pricing - - - Perfect Competition
C21 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Cross-Sectional Models; Spatial Models; Treatment Effect Models

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Deacon, Robert T & Sonstelie, Jon, 1985. "Rationing by Waiting and the Value of Time: Results from a Natural Experiment," Journal of Political Economy, University of Chicago Press, vol. 93(4), pages 627-47, August. [Downloadable!] (restricted)
  2. Scotchmer, Suzanne, 1986. "The short-run and long-run benefits of environmental improvement," Journal of Public Economics, Elsevier, vol. 30(1), pages 61-81, June. [Downloadable!] (restricted)
  3. Berliant, Marcus & Papageorgiou, Yorgos Y. & Wang, Ping, 1990. "On welfare theory and urban economics," Regional Science and Urban Economics, Elsevier, vol. 20(2), pages 245-261, September. [Downloadable!] (restricted)
  4. Coulson, N. Edward, 1989. "The empirical content of the linearity-as-repackaging hypothesis," Journal of Urban Economics, Elsevier, vol. 25(3), pages 295-309, May. [Downloadable!] (restricted)
  5. Kau, James B. & Sirmans, C. F., 1979. "Urban land value functions and the price elasticity of demand for housing," Journal of Urban Economics, Elsevier, vol. 6(1), pages 112-121, January. [Downloadable!] (restricted)
  6. 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.. [Downloadable!] (restricted)
  7. Bryan Ellickson & Birgit Grodal & Suzanne Scotchmer & William R. Zame, 1999. "Clubs and the Market," Econometrica, Econometric Society, vol. 67(5), pages 1185-1218, September.
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  8. McMillen, Daniel P., 2003. "The return of centralization to Chicago: using repeat sales to identify changes in house price distance gradients," Regional Science and Urban Economics, Elsevier, vol. 33(3), pages 287-304, May. [Downloadable!] (restricted)
  9. McMillen, Daniel P., 1990. "Consistent estimation of the urban land value function," Journal of Urban Economics, Elsevier, vol. 27(3), pages 285-293, May. [Downloadable!] (restricted)
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