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American Economic Review Vol. 102 No. 5 2012

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

Patrick Bajari1; Jane Cooley Fruehwirth2; Kyoo il Kim3; Christopher Timmins4

1 University of Minnesota and NBER, 1925 4th Street South, Minneapolis, MN 55455. · 2 University of Cambridge and Christ's College, Faculty of Economics, Austin Robinson Building, Sidgwick Avenue, Cambridge, UK CB3 9DD. · 3 University of Minnesota, 1925 4th Street South, Minneapolis, MN 55455. · 4 Duke University and NBER, PO Box 90097, Durham, NC 27708.

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.

DOI
10.1257/aer.102.5.1898
Volume
102
Issue
5
Pages
1898-1926
Language
en
Sources
bibtex:phds-export.bib openalex crossref

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