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A Unified Framework for Measuring Preferences for Schools and Neighborhoods


Patrick J. Bayer


Duke University - Department of Economics; National Bureau of Economic Research (NBER)

Robert McMillan


University of Toronto - Department of Economics

Fernando V. Ferreira


University of Pennsylvania - The Wharton School

November 2003

Yale University Economic Growth Center Discussion Paper No. 872

Abstract:     
This paper sets out a framework for estimating household preferences over a broad range of housing and neighborhood characteristics, some of which are determined by the way that households sort in the housing market. This framework brings together the treatment of heterogeneity and selection that has been the focus of the traditional discrete choice literature with a clear strategy for dealing with the correlation of unobserved neighborhood quality with both school quality and neighborhood sociodemographics. We estimate the model using rich data on a large metropolitan area, drawn from a restricted version of the Census. The estimates indicate that, on average, households are willing to pay an additional one percent in house prices - substantially lower than in prior work - when the average performance of the local school is increased by 5 percent. There is also evidence of considerable preference heterogeneity. We also show that the full capitalization of school quality into housing prices is typically 70-75 percent greater than the direct effect as the result of a social multiplier, neglected in the prior literature, whereby increases in school quality also raises prices by attracting households with more education and income to the corresponding neighborhood.

Number of Pages in PDF File: 69

Keywords: Capitalization, Local Public Goods, School Quality, Discrete Choice Models, Hedonic Price Regression, Education Demand

JEL Classification: D58, H0, H4, H7, I2, R21, R31

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Date posted: November 15, 2003  

Suggested Citation

Bayer, Patrick J. and McMillan, Robert and Ferreira, Fernando V., A Unified Framework for Measuring Preferences for Schools and Neighborhoods (November 2003). Yale University Economic Growth Center Discussion Paper No. 872. Available at SSRN: http://ssrn.com/abstract=466280

Contact Information

Patrick J. Bayer (Contact Author)
Duke University - Department of Economics ( email )
Durham, NC 27708-0204
United States
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
Robert McMillan
University of Toronto - Department of Economics ( email )
150 St. George Street
Toronto, Ontario M5S 3G7
Canada
416-978-4190 (Phone)
416-978-6713 (Fax)
Fernando V. Ferreira
University of Pennsylvania - The Wharton School ( email )
3641 Locust Walk
Philadelphia, PA 19104-6365
United States
215-898-7181 (Phone)
215-573-2220 (Fax)
HOME PAGE: http://real.wharton.upenn.edu/~fferreir/

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