An Anti-IV Approach for Pricing Residential Amenities: Applications to Flood Risk *

75 Pages Posted: 31 Jul 2024

See all articles by Alex Bell

Alex Bell

Georgia State University - Department of Economics

Stephen B. Billings

University of Colorado - Boulder

Sophie Calder-Wang

University of Pennsylvania - The Wharton School

Shusheng Zhong

Northwestern University

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

Suggested Citation

Bell, Alex and Billings, Stephen B. and Calder-Wang, Sophie and Zhong, Shusheng, An Anti-IV Approach for Pricing Residential Amenities: Applications to Flood Risk * (July 20, 2024). The Wharton School Research Paper, Available at SSRN: https://ssrn.com/abstract=4899974 or http://dx.doi.org/10.2139/ssrn.4899974

Alex Bell

Georgia State University - Department of Economics ( email )

P.O. Box 3992
Atlanta, GA 30302-3992
United States

Stephen B. Billings

University of Colorado - Boulder ( email )

Leeds School of Business
Koelbel Building
Boulder, CO US 80309
United States

Sophie Calder-Wang (Contact Author)

University of Pennsylvania - The Wharton School ( email )

3641 Locust Walk
Philadelphia, PA 19104-6365
United States

Shusheng Zhong

Northwestern University ( email )

2001 Sheridan Road
Evanston, IL 60208
United States

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
311
Abstract Views
914
Rank
202,111
PlumX Metrics