Inconsistency in Welfare Inferences from Distance Variables in Hedonic Regressions
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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.
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- Inconsistency in Welfare Inferences from Distance Variables in Hedonic Regressions
The Journal of Real Estate Finance and Economics
Volume 43, Issue 3 , pp 385-400
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- 1. School of Public & Environmental Affairs, Indiana University, Bloomington, IN, 47405, USA
- 2. Department of Agricultural and Applied Economics, Texas Tech University, Agricultural Sciences Building—Box 42132, Lubbock, TX, 79409, USA
- 3. Department of Marketing and Economics, Langdale College of Business Administration, Valdosta State University, Valdosta, GA, 31698-0075, USA