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

Citation

Bajari, Patrick L.; Fruehwirth, Jane Cooley; Kim, Kyoo-il; & Timmins, Christopher D. (2012). A Rational Expectations Approach to Hedonic Price Regressions with Time-Varying Unobserved Product Attributes: The Price of Pollution. American Economic Review, 102(5), 1898-1926.

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 home buyer 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.

URL

http://dx.doi.org/10.1257/aer.102.5.1898

Reference Type

Journal Article

Year Published

2012

Journal Title

American Economic Review

Author(s)

Bajari, Patrick L.
Fruehwirth, Jane Cooley
Kim, Kyoo-il
Timmins, Christopher D.

ORCiD

Fruehwirth - 0000-0001-5018-1143