An Anti-IV Approach for Pricing Residential Amenities: Applications to Flood Risk *
75 Pages Posted: 31 Jul 2024
Date Written: July 20, 2024
Abstract
Understanding how markets price housing amenities is essential to addressing residential socioeconomic disparities. Traditional methods have struggled with unobserved quality, often producing wrong-signed estimates. This paper introduces a novel "anti-instrument" approach to estimating amenity prices amid unobserved quality. Our identification strategy relies on an "anti-instrumental" variable that is relevant to the unobserved quality, but conditionally independent from the amenity of interest, which are properties opposite of typical instruments for amenities. We apply this method to estimate the implicit price of flood risk using detailed housing transaction records and house-level flood risk measures. Household income, used as an anti-instrument, successfully recovers the negative price of flood risk. We find that being located in a FEMA-designated floodplain reduces home prices by 2.8% on average. Drawing on more granular measures of flood risk, we find increasing price discounts for homes with higher flood probabilities, with the most risky locations suffering a discount of nearly 5%. These price estimates are crucial for evaluating returns on investment in local public goods and environmental policies.
Keywords: Hedonic Pricing, Unobserved Quality, Amenities, Flood Risk R32, C39, Q51, Q54, R21
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