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Hedonic Price Functions: Guidance On Empirical Specification

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  • Kuminoff, Nicolai V.
  • Parmeter, Christopher F.
  • Pope, Jaren C.

Abstract

The hedonic pricing model is widely accepted as a method for estimating the marginal willingness to pay for spatially delineated amenities. Empirical applications typically rely on one of three functional forms—linear, semi-log, and double-log—and rarely involve rigorous specification testing. This phenomenon is largely due to an influential simulation study by Cropper, Deck and McConnell (CDM) (1988) that found, among other things, that simpler linear specifications outperformed more flexible functional forms in the face of omitted variables. In the 20 years that have elapsed since their study, there have been major computational advances and significant changes in the way hedonic price functions can be estimated. The purpose of our paper is to update and extend the CDM (1988) simulations to investigate current issues in hedonic modeling. Three preliminary results obtained from our theoretically consistent Monte Carlo simulation have been highlighted in this paper: (i) we find that adding spatial fixed effects (census tract dummies) to linear models does improve their performance. This is true both when all attributes are observed, and when some attributes are unobserved, (ii) adding the spatial fixed effects to the more flexible specifications such as the quadratic and quadratic box-cox does not improve their performance when all housing attributes are observed. However, when some housing attributes are unobserved, the spatial fixed effects significantly improves the performance of flexible specifications as well, and (iii) increasing the sample size from CDM’s 200 observations to a sample size of 2000 (which is more representative of modern applications) changes the relative performance of different specifications.

Suggested Citation

  • Kuminoff, Nicolai V. & Parmeter, Christopher F. & Pope, Jaren C., 2008. "Hedonic Price Functions: Guidance On Empirical Specification," 2008 Annual Meeting, July 27-29, 2008, Orlando, Florida 6555, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
  • Handle: RePEc:ags:aaea08:6555
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    File URL: http://purl.umn.edu/6555
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    References listed on IDEAS

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    Cited by:

    1. Gaetano Lisi, 2013. "On the Functional Form of the Hedonic Price Function: A Matching-theoretic Model and Empirical Evidence," International Real Estate Review, Asian Real Estate Society, vol. 16(2), pages 189-207.
    2. Lisi, Gaetano, 2012. "On the theoretical derivation of a functional form for the hedonic price function," MPRA Paper 37066, University Library of Munich, Germany.

    More about this item

    Keywords

    Hedonic; Functional Form; Monte Carlo Simulation; Property Value Model; Demand and Price Analysis; Land Economics/Use; Research Methods/ Statistical Methods; Q15; Q51; Q53; C15; R52;

    JEL classification:

    • Q15 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Agriculture - - - Land Ownership and Tenure; Land Reform; Land Use; Irrigation; Agriculture and Environment
    • Q51 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Valuation of Environmental Effects
    • Q53 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Air Pollution; Water Pollution; Noise; Hazardous Waste; Solid Waste; Recycling
    • C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Statistical Simulation Methods: General
    • R52 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Regional Government Analysis - - - Land Use and Other Regulations

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