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

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Listed:
  • Patrick Bajari
  • Jane Cooley
  • 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 homebuyer 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.

Suggested Citation

  • Patrick Bajari & Jane Cooley & Kyoo il Kim & Christopher Timmins, 2010. "A Theory-Based Approach to Hedonic Price Regressions with Time-Varying Unobserved Product Attributes: The Price of Pollution," NBER Working Papers 15724, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:15724
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    References listed on IDEAS

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    1. Chunrong Ai & Xiaohong Chen, 2003. "Efficient Estimation of Models with Conditional Moment Restrictions Containing Unknown Functions," Econometrica, Econometric Society, vol. 71(6), pages 1795-1843, November.
    2. Patrick Bajari & C. Lanier Benkard, 2005. "Demand Estimation with Heterogeneous Consumers and Unobserved Product Characteristics: A Hedonic Approach," Journal of Political Economy, University of Chicago Press, vol. 113(6), pages 1239-1276, December.
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    Cited by:

    1. Muehlenbachs, Lucija & Spiller, Elisheba & Timmins, Christopher, "undated". "The Housing Market Impacts of Shale Gas Development," Discussion Papers dp-13-39-rev, Resources For the Future.
    2. Lucija Muehlenbachs & Elisheba Spiller & Christopher Timmins, 2015. "The Housing Market Impacts of Shale Gas Development," American Economic Review, American Economic Association, vol. 105(12), pages 3633-3659, December.
    3. 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.
    4. Zhang, Wendong & Irwin, Elena G. & Nickerson, Cynthia J., 2012. "The Expanding Ethanol Market and Farmland Values: Identifying the Changing Influence of Proximity to Agricultural Delivery Points," 2012 Annual Meeting, August 12-14, 2012, Seattle, Washington 124690, Agricultural and Applied Economics Association.

    More about this item

    JEL classification:

    • C01 - Mathematical and Quantitative Methods - - General - - - Econometrics
    • Q51 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Valuation of Environmental Effects

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