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Hedonic Markets and Explicit Demands: Bid-Function Envelopes for Public Services, Neighborhood Amenities, and Commuting Costs

Hedonic regressions with house value as the dependent vaqriable are widely used to study the value of public services and amenities. This paper builds on the theory of household bidding and sorting to derive a bid function envelope, which provides a form for these regressions. This approach uses a general characterization of household heterogeneity, yields estimates of the price elasticities of demands for services and amenities directly from the hedonic with no need for a Rosen two-step procedure, and provides tests of key hypotheses about household sorting. An application to data from Cleveland in 2000 yields precise estimates of price elasticities for school quality, distance from environmental hazards, and neighborhood ethnic composition. The results support the sorting hypotheses and indicate that household preferences are very heterogeneous, with some households placing a negative value on many "amenities."

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Paper provided by Center for Policy Research, Maxwell School, Syracuse University in its series Center for Policy Research Working Papers with number 114.

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Length: 71 pages
Date of creation: Mar 2009
Date of revision:
Handle: RePEc:max:cprwps:114
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