Article

The Journal of Real Estate Finance and Economics

, Volume 43, Issue 3, pp 385-400

Inconsistency in Welfare Inferences from Distance Variables in Hedonic Regressions

  • Justin M. RossAffiliated withSchool of Public & Environmental Affairs, Indiana University Email author 
  • , Michael C. FarmerAffiliated withDepartment of Agricultural and Applied Economics, Texas Tech University
  • , Clifford A. LipscombAffiliated withDepartment of Marketing and Economics, Langdale College of Business Administration, Valdosta State University

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Abstract

In hedonic analysis, a common approach for eliciting information regarding the welfare significance of some landmark or (dis)amenity is to control for its distance from each observation. Unfortunately, the effects of distances to amenities on housing prices are generally not consistent indicators of the true price impact of that amenity. Instead these variables serve as proxies for the relative position of every observation in space. Whenever a household considers more than two landmarks in a housing purchase, distance variable parameter estimates are simply the best linear fitted weights for that multiple criteria location decision. Simulations illustrate extreme sensitivity in parameter estimates to the researcher’s choice of landmarks. One strategy models the location of each observation directly instead of its distances to amenities. Using the quadratic controls of longitude and latitude controls for location effects on price to assure unbiased estimates of non-distance variable regressors.

Keywords

Hedonic Distance Sensitivity analysis

JEL codes

R0 Q5 C8