Project Title:

Estimating marginal willingness to pay for neighbourhood amenties

Project Number:

2017_007

Researchers:

Prof Christopher Timmins (Duke University)
Chuhang Yin (Duke University)
Prof Gwilym Price (University of Sheffield)
Gavin Guanpeng Dong (University of Liverpool)
Stephan Heblich (University of Bristol)

Start Date:

1st September 2017

Summary:

Our study aims to estimate how individual marginal willingness to pay (MWTP) for neighbourhood depends on individual attributes using a hedonic valuation framework. In economics, the hedonic valuation approach estimates demand or value for neighbourhood attributes using observed housing decisions of individuals in the property (i.e., owned or rented housing) market. It seeks to explain the value of a commodity, e.g. housing, into its constituent characteristics, and obtain estimates of the contributory value of each characteristic without explicitly modelling the equilibrium levels of chosen amenities. In our hedonic valuation analysis, we will first recover the implicit prices of neighbourhood amenities by running a series of hedonic regressions (one for each census year 2001 & 2011) with neighbourhood housing price as the dependent variable and neighbourhood amenities (pollution, school quality, access to services, etc.) as the independent variables. Then we will estimate a flexible function describing how each amenity, chosen by individuals in equilibrium, varies with those individuals’ attributes. Finally, we will demonstrate how these equations can be used in combination to recover a separate MWTP function for each individual.  Econometrically identifying MWTP has proven difficult in 40 years of hedonic research. We demonstrate the value of a large panel like the SLS, and provide new estimates that will be of use in terms of valuing large changes in neighbourhood amenities.

References:

Bajari, P. and L. Benkard. (2005). “Demand Estimation With Heterogeneous Consumers and Unobserved Product Characteristics: A Hedonic Approach”, Journal of Political Economy, 113(6): 1239-1276.
Epple, D. (1987). “Hedonic Prices and Implicit Markets: Estimating Demand and Supply Functions for Differentiated Products,” Journal of Political Economy, 95(1): 59-80.
Heckman, J. J., Matzkin, R. L., & Nesheim, L. (2010). “Nonparametric Identification and Estimation of Nonadditive Hedonic Models”, Econometrica, 78(5): 1569–1591.
Rosen, S. (1974). Hedonic prices and implicit markets: product differentiation in pure competition. Journal of political economy, 82(1), 34-55

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