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Pricing Characteristics: An Application of Shepard's Dual Lemma

Author

Listed:
  • Fare, Rolf

    (Oregon State University)

  • Grosskopf, Shawna

    (Oregon State University)

  • Shang, Chenjun

    (Rice University)

  • Sickles, Robin

    (Rice University)

Abstract

The recent housing bubble has provided impetus for revisiting indicators of housing price inflation and property characteristics. Diewert (2011, Alternative Approaches to Measuring Housing Price Inflation, paper presented at the Economic Measurement Group Workshop, 2011, UNSW, Australia) for example has provided a comparison of various methods of constructing property price indices using index number and hedonic regression methods, which he illustrates using data from a small Dutch town over a number of quarters. We provide an alternative approach based on Shephard's dual lemma and apply it to the same data used by Diewert. This method avoids the multicollinearity problem associated with traditional hedonic regression, and the resulting prices of property characteristics show smoother trends than Diewert's results. We also revisit the Diewert and Shimizu (2013) study that employed hedonic regressions to decompose the price of residential property in Tokyo into land and structure components and that constructed constant quality indexes for land and structure prices respectively. We use three models from Diewert and Shimizu (2013) to fit our real estate data from town "A" in Netherlands, and also construct the price indices for land and structure, which are compared with our results derived above.

Suggested Citation

  • Fare, Rolf & Grosskopf, Shawna & Shang, Chenjun & Sickles, Robin, 2015. "Pricing Characteristics: An Application of Shepard's Dual Lemma," Working Papers 15-013, Rice University, Department of Economics.
  • Handle: RePEc:ecl:riceco:15-013
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    References listed on IDEAS

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    1. M. Denny, 1974. "The Relationship Between Functional Forms for the Production System," Canadian Journal of Economics, Canadian Economics Association, vol. 7(1), pages 21-31, February.
    2. Federico Belotti & Silvio Daidone & Giuseppe Ilardi & Vincenzo Atella, 2013. "Stochastic frontier analysis using Stata," Stata Journal, StataCorp LP, vol. 13(4), pages 718-758, December.
    3. W. Erwin DIEWERT & Jan de HAAN & Rens HENDRIKS, 2011. "The Decomposition of a House Price Index into Land and Structures Components: A Hedonic Regression Approach," The Valuation Journal, National Association of Romanian Valuers, vol. 6(1), pages 58-105.
    4. COELLI, Tim, 2000. "On the econometric estimation of the distance function representation of a production technology," CORE Discussion Papers 2000042, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    5. Diewert, W. E., 1976. "Exact and superlative index numbers," Journal of Econometrics, Elsevier, vol. 4(2), pages 115-145, May.
    6. Diewert, Erwin & Shimizu, Chihiro, 2013. "A Conceptual Framework for Commercial Property Price Indexes," Economics working papers erwin_diewert-2013-44, Vancouver School of Economics, revised 09 Oct 2013.
    7. 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.
    8. Diewert, Erwin, 2011. "Alternative Approaches to Measuring House Price Inflation," Economics working papers erwin_diewert-2011-1, Vancouver School of Economics, revised 07 Jan 2011.
    9. David H. Good & Robin C. Sickles & Jesse C. Weiher, 2008. "A Hedonic Price Index For Airline Travel," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 54(3), pages 438-465, September.
    10. W. Erwin Diewert, 2003. "Hedonic Regressions. A Consumer Theory Approach," NBER Chapters, in: Scanner Data and Price Indexes, pages 317-348, National Bureau of Economic Research, Inc.
    11. Dennis Epple & Brett Gordon & Holger Sieg, 2010. "A New Approach to Estimating the Production Function for Housing," American Economic Review, American Economic Association, vol. 100(3), pages 905-924, June.
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    Cited by:

    1. Bhattacharyya, Aditi & Kutlu, Levent & Sickles, Robin C., 2018. "Pricing Inputs and Outputs: Market prices versus shadow prices, market power, and welfare analysis," Working Papers 18-009, Rice University, Department of Economics.

    More about this item

    JEL classification:

    • C02 - Mathematical and Quantitative Methods - - General - - - Mathematical Economics
    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • C43 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Index Numbers and Aggregation
    • D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • R21 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Household Analysis - - - Housing Demand

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