Hedonic Vices: Fixing Inferences about Willingness to Pay in Recent House-Value Studies

Abstract

A key tool for studying the demand for neighborhood amenities and estimating the benefits from amenity improvements is a regression of house value on amenity levels, controlling for housing characteristics. Several scholars have developed methods to address the methodological challenges, such as endogeneity, faced by these “hedonic” regressions. Unfortunately, however, some recent studies neglect basic principles of hedonic estimation in Rosen [(1974). Hedonic Prices and Implicit Markets: Product Differentiation in Pure Competition. Journal of Political Economy , 82 (1), 34–55]. After providing conceptual background, this article explains these hedonic “vices” and how to avoid them. We focus on inappropriate functional forms, inappropriate control variables, and misinterpretation of hedonic regression results. Our analysis is supported using data from the Cleveland area in 2000 and a simulation model.