Inconsistency in Welfare Inferences from Distance Variables in Hedonic Regressions
Justin M. Ross
Indiana University - School of Public & Environmental Affairs
Michael C. Farmer
Texas Tech University - Department of Agricultural and Applied Economics
Clifford A. Lipscomb
October 16, 2009
Journal of Real Estate Finance and Economics, Forthcoming
In hedonic analysis, a common approach for eliciting information regarding the welfare significance of some landmark or (dis)amenity is to control for its distance from each observation. Unfortunately, the effects of distances to amenities on housing prices are generally not consistent indicators of the true price impact of that amenity. Instead these variables serve as proxies for the relative position of every observation in space. Whenever a household considers more than two landmarks in a housing purchase, distance variable parameter estimates are simply the best linear fitted weights for that multiple criteria location decision. Simulations illustrate extreme sensitivity in parameter estimates to the researcher’s choice of landmarks. One strategy models the location of each observation directly instead of its distances to amenities. Using the quadratic measure of longitude and latitude from an arbitrary fixed location controls for location effects on price to assure unbiased estimates of non-distance variable regressors.
Number of Pages in PDF File: 30
Keywords: Hedonic, distance, sensitivity analysis
JEL Classification: R0, Q5, C8
Date posted: November 3, 2008 ; Last revised: June 18, 2011
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