Confronting Price Endogeneity in a Duration Model of Residential Subdivision Development

Abstract

Spatial equilibrium in housing markets implies that distant factors are correlated with prices in specific (focal) neighborhoods through market mechanisms. Using this logic, we develop a novel approach for handling price endogeneity in a reduced-form land use model. We combine a control function approach with a duration model of optimal land development to shed light on the role of price and supply-side factors that influence subdivision development at a micro level. We find that failure to control for endogeneity results in large differences in estimates of residential land supply price elasticities. Specifically, we find an elasticity of 2.06 compared to 0.67 in a model that ignores endogeneity.

Keywords: Endogeneity, Control Function, Duration Modeling, Land Use, Supply Elasticity

JEL Classification: C26, R12, R14, R52