CPR Working Paper Series No. 114
Hedonic Markets and Explicit Demands: Bid-Function Envelopes for Public Services, Neighborhood Amenities,
and Commuting Costs
John Yinger
March 2009
Abstract:
Hedonic regressions with house value as the dependent variable 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 demand 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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