Confronting Price Endogeneity in a Duration Model of Residential Subdivision Development

54 Pages Posted: 22 Mar 2015 Last revised: 2 Jan 2016

See all articles by Douglas H. Wrenn

Douglas H. Wrenn

Pennsylvania State University, Agricultural Economics, Sociology, and Education

H. Allen Klaiber

Ohio State University (OSU) - Department of Agricultural, Environmental & Development Economics

David A. Newburn

University of Maryland - Department of Agricultural & Resource Economics

Date Written: December 31, 2015

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

Suggested Citation

Wrenn, Douglas H. and Klaiber, H. Allen and Newburn, David Allen, Confronting Price Endogeneity in a Duration Model of Residential Subdivision Development (December 31, 2015). Available at SSRN: https://ssrn.com/abstract=2581755 or http://dx.doi.org/10.2139/ssrn.2581755

Douglas H. Wrenn (Contact Author)

Pennsylvania State University, Agricultural Economics, Sociology, and Education ( email )

University Park, PA 16802-3306
United States

H. Allen Klaiber

Ohio State University (OSU) - Department of Agricultural, Environmental & Development Economics ( email )

2120 Fyffe Rd
Columbus, OH 43210-1067
United States

David Allen Newburn

University of Maryland - Department of Agricultural & Resource Economics ( email )

Symmons Hall, Rm 2200
University of Maryland
College Park, MD 20742-5535
United States

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