Inconsistency in Welfare Inferences from Distance Variables in Hedonic Regressions

Posted: 11 Aug 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 Lipscomb

Valdosta State University

Multiple version iconThere are 2 versions of this paper

Date Written: August 10, 2011

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, Inconsistency in Welfare Inferences from Distance Variables in Hedonic Regressions (August 10, 2011). Journal of Real Estate Finance and Economics, Vol. 43, No. 3, 2011, Available at SSRN: https://ssrn.com/abstract=1907861

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 Lipscomb

Valdosta State University ( email )

1500 N Patterson Street
Valdosta, GA 31698
United States

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