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A Rational Expectations Approach to Hedonic Price Regressions with Time-Varying Unobserved Product Attributes: The Price of Pollution

Author

Listed:
  • Patrick Bajari
  • Jane Cooley Fruehwirth
  • Kyoo il Kim
  • Christopher Timmins

Abstract

We propose a new strategy for a pervasive problem in the hedonics literature: recovering hedonic prices in the presence of time-varying correlated unobservables. Our approach relies on an assumption about home buyer rationality, under which prior sales prices can be used to control for time-varying unobservable attributes of the house or neighborhood. Using housing transactions data from California's Bay Area between 1990 and 2006, we apply our estimator to recover marginal willingness to pay for reductions in three of the EPA's "criteria" air pollutants. Our findings suggest that ignoring bias from time-varying correlated unobservables considerably understates the benefits of a pollution reduction policy. (JEL D12, D84, Q53, Q58, R21)

Suggested Citation

  • Patrick Bajari & Jane Cooley Fruehwirth & Kyoo il Kim & Christopher Timmins, 2012. "A Rational Expectations Approach to Hedonic Price Regressions with Time-Varying Unobserved Product Attributes: The Price of Pollution," American Economic Review, American Economic Association, vol. 102(5), pages 1898-1926, August.
  • Handle: RePEc:aea:aecrev:v:102:y:2012:i:5:p:1898-1926
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    References listed on IDEAS

    as
    1. Michael Greenstone & Justin Gallagher, 2008. "Does Hazardous Waste Matter? Evidence from the Housing Market and the Superfund Program," The Quarterly Journal of Economics, Oxford University Press, vol. 123(3), pages 951-1003.
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    4. Murphy, Kevin M & Topel, Robert H, 2002. "Estimation and Inference in Two-Step Econometric Models," Journal of Business & Economic Statistics, American Statistical Association, vol. 20(1), pages 88-97, January.
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    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..
    7. Brown, James N & Rosen, Harvey S, 1982. "On the Estimation of Structural Hedonic Price Models," Econometrica, Econometric Society, vol. 50(3), pages 765-768, May.
    8. Richard Blundell & Stephen Bond, 2000. "GMM Estimation with persistent panel data: an application to production functions," Econometric Reviews, Taylor & Francis Journals, vol. 19(3), pages 321-340.
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    11. 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.
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    15. Kelly C. Bishop & Christopher Timmins, 2011. "Hedonic Prices and Implicit Markets: Estimating Marginal Willingness to Pay for Differentiated Products Without Instrumental Variables," NBER Working Papers 17611, National Bureau of Economic Research, Inc.
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    More about this item

    JEL classification:

    • D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • Q53 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Air Pollution; Water Pollution; Noise; Hazardous Waste; Solid Waste; Recycling
    • Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy
    • R21 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Household Analysis - - - Housing Demand

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