This website uses cookies.

By clicking the "Accept" button or continuing to browse our site, you agree to first-party and session-only cookies being stored on your device to enhance site navigation and analyze site performance and traffic. For more information on our use of cookies, please see our Privacy Policy.

  1. Home
  2. Journals
  3. American Economic Review
  4. August 2012
  5. A Rational Expectations Approach to Hedonic Price Regressions with Time-Varying Unobserved Product Attributes: The Price of Pollution

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

  • Patrick Bajari
  • Jane Cooley Fruehwirth
  • Kyoo il Kim
  • Christopher Timmins
American Economic Review
vol. 102, no. 5, August 2012
(pp. 1898-1926)
Download Full Text PDF

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. (JEL D12, D84, Q53, Q58, R21)

Citation

Bajari, Patrick, Jane Cooley Fruehwirth, Kyoo il Kim, and Christopher Timmins. 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. DOI: 10.1257/aer.102.5.1898

Additional Materials

JEL Classification

  • D12 Consumer Economics: Empirical Analysis
  • D84 Expectations; Speculations
  • Q53 Air Pollution; Water Pollution; Noise; Hazardous Waste; Solid Waste; Recycling
  • Q58 Environmental Economics: Government Policy
  • R21 Urban, Rural, Regional, and Transportation Economics: Housing Demand