Inconsistency in Welfare Inferences from Distance Variables in Hedonic Regressions

30 Pages Posted: 3 Nov 2008 Last revised: 18 Jun 2011

See all articles by Justin M. Ross

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

Bartow Street Capital LLC; Georgia Institute of Technology

Multiple version iconThere are 2 versions of this paper

Date Written: October 16, 2009

Abstract

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.

Keywords: Hedonic, distance, sensitivity analysis

JEL Classification: R0, Q5, C8

Suggested Citation

Ross, Justin M. and Farmer, Michael C. and Lipscomb, Clifford A., Inconsistency in Welfare Inferences from Distance Variables in Hedonic Regressions (October 16, 2009). Journal of Real Estate Finance and Economics, Forthcoming, Available at SSRN: https://ssrn.com/abstract=1292479

Justin M. Ross (Contact Author)

Indiana University - School of Public & Environmental Affairs ( email )

1315 East Tenth Street
Bloomington, IN 47405
United States

Michael C. Farmer

Texas Tech University - Department of Agricultural and Applied Economics ( email )

Suite 167, 2625 Memorial Circle
TTU Administration
Lubbock, TX 79409
United States

Clifford A. Lipscomb

Bartow Street Capital LLC ( email )

106 N. Bartow Street
Cartersville, GA 30120
United States
770-334-3952 (Phone)

Georgia Institute of Technology ( email )

685 Cherry St.
Atlanta, GA 30332-0345
United States

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