House Prices and the Value of Amenities

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House Prices and the Value of Amenities
Ï How much does an additional bedroom adds to the house price?

Ï Does better school quality in the neighborhood increase the value of homes?

Ï How does crime rate affect house prices?

Ï How much do people value a new park in their neighborhood?

Ï How much do people value reduction in the crime rate?

Ï How much do people value lower air/noise pollution?

Ï How much do people value more trees in their street?

Ï How can we measure the benefit of clean water?

Ï How can we estimate the demand of school quality?

Ï In all these examples we want to estimate the value of something that we do not
observe their prices
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Hedonic function
Grocery bag

Ï Imagine your trip to the grocery store.

Ï How do you calculate your total expenditure?

Ï Now suppose you do not know the price of each item but you observe:
Ï People’s total expenditure
Ï All the items in their grocery bags

Ï Can you estimate the price of each item? (you estimate of price is called “(marginal)
implicit price")

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Hedonic function
Housing- Rosen (1974)

Ï Similar to a grocery bag, a dwelling is a bundle of attributes like floor size, number of
bedrooms, bathrooms, ..., neighborhood amenities like crime rate, pollution, ...

Ï How can we find the value of each attribute?

before: max u(c, q) st . c + pq = y
c,q

now: max u(c, a 1 , ..., a n ) st . c + P (a 1 , ..., a n ) = y

c,a 1 ,...,a n

separability assumption: max c + u(a 1 , ..., a n ) st . c + P (a 1 , ..., a n ) = y

c,a 1 ,...,a n

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Hedonic function
Housing: demand side

Ï suppose we can simplify all

characteristics and amenities into one
and call it design quality.

Ï also suppose we can write utility in a

simplified following form

max u(c, a) = c+u(a) st . c+P (a) = y

c,a

Ï the bid curve shows the maximum

amount that a household is willing to
pay for a given design quality, holding
the utility constant

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Hedonic function
Housing: demand side

Ï The position of the bid curve depends

on the level of utility

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Hedonic function
Housing supply side

Ï The profit of producer of a is

π = P (a) −C ost (a)

Ï The offer curve shows the minimum

amount that a producer is willing to
receive for a given design quality,
holding the profit constant

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Hedonic function
Housing: supply side

Ï The position of the offer curve depends

on the level of profit

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Hedonic equilibrium

Ï In equilibrium the slope of offer curve

and bid curve are the same. why?

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Bid curve for high and low quality demand households

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Bid curve for high and low quality cost producers

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Hedonic curve

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Hedonic regression
McMillen and McDonald (2014), check the Hedonic Jupyter notebook
Ï most hedonic studies use exponential function P = exp(α0 + α1 F + ... + αr X )

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How much do people value reduction in the crime rate?
Rosen 1974 version

max u(c, crime , a) = c + u(crime , a) st . c + P (crime , a) = y =⇒

c,crime ,a
∂u(crime , a) ∂P (crime , a)
max y − P (crime , a) + u(crime , a) =⇒ = = βcrime
crime ,a ∂crime ∂crime

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Discussion

Ï Hedonic model is a useful tool for price indexes

Ï Finding the "implicit price" of attributes is not easy and hedonic model does not help.
why?

Ï How can we address endogeneity problem? (IV, regression discontinuity, natural

experiments)

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Water pollution
DOES HAZARDOUS WASTE MATTER? EVIDENCE FROM THE HOUSING MARKET AND THE SUPERFUND
PROGRAM, Greenstone and Gallager, (QJE, 2008)

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Toxic plants
Environmental Health Risks and Housing Values: Evidence from 1,600 Toxic Plant Openings and Closings, Janet Currie,
Lucas Davis, Michael Greenstone, and Reed Walker, (AER, 2015)

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Crime
Estimates of the Impact of Crime Risk on Property Values from Megan’s Laws, Linden and Rockoff (AER, 2009)

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School Quality
Neighbourhood, school zoning and the housing market: Evidence from NewSouth Wales, Tchatoka and Varvaris, (JHE,
2013)

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School Quality
A Unified Framework for Measuring Preferences for Schools and Neighborhoods, Bayer, Ferreira, McMillan (JPE, 2007)

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Trees
Cool Cities: The Value of Urban Trees (L. Han, S. Heblich, C. Timmins, Y. Zylberberg, 2021)
Between 2007 and 2017, the city had lost more than half of these 860,000 ash trees.

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Consideration

Ï you should consider all possible variables that may affect your regression

Ï you should consider people sorting

Ï The hedonic analysis is usually useful when you are looking within a city. If you look
at multiple cities it is not correct. why?

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