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Credit Constraints and Bias in Hedonic Amenity Valuations

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  • Heilbron, John

Abstract

I demonstrate that credit constraints bias price-based (cf. rent-based) hedonic valuations of local public amenities. Mis-measurement of the private value of local public amenities distorts welfare analysis and could cause under-investment in amenities. I introduce a method to measure this bias by applying the hedonic framework to a problem of mortgage choice in the presence of credit constraints. I use Fannie Mae pricing grids and private mortgage insurance requirements to construct borrower-level mortgage choice menus and estimate the extent of bias among fixed-rate agency loan borrowers. I find evidence that traditional hedonic techniques understate the value of amenities by ~50%.

Suggested Citation

  • Heilbron, John, 2021. "Credit Constraints and Bias in Hedonic Amenity Valuations," MPRA Paper 125713, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:125713
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    File URL: https://mpra.ub.uni-muenchen.de/125713/1/MPRA_paper_125713.pdf
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    JEL classification:

    • D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
    • H81 - Public Economics - - Miscellaneous Issues - - - Governmental Loans; Loan Guarantees; Credits; Grants; Bailouts
    • R21 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Household Analysis - - - Housing Demand

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