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A Rational Expectations Approach to Hedonic Price Regressions with Time-Varying Unobserved Product Attributes: The Price of Pollution
Abstract
We propose a new strategy for a pervasive problem in the hedonics literature: recovering hedonic prices in the presence of time-varying correlated unobservables. Our approach relies on an assumption about home buyer rationality, under which prior sales prices can be used to control for time-varying unobservable attributes of the house or neighborhood. Using housing transactions data from California's Bay Area between 1990 and 2006, we apply our estimator to recover marginal willingness to pay for reductions in three of the EPA's “criteria” air pollutants. Our findings suggest that ignoring bias from time-varying correlated unobservables considerably understates the benefits of a pollution reduction policy. (JEL D12, D84, Q53, Q58, R21)
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In the citing paper
“In, say, the first regression equation in the bottom of page 1915, the dependent variable is the change in the price of house j between sales 2 and 3, and the explanatory variables are the change in various pollutants in the area around house j between sales 2 and 3, and some controls.”
From Two-Way Fixed Effects Estimators with Heterogeneous Treatment Effects (2020) · cites this paper as Bajari et al. (2012)
In the citing paper
“The stable groups assumption is presumably satisfied: it is likely that for each pair of consecutive sales, there are houses where the level of each pollutant does not change.”
From Two-Way Fixed Effects Estimators with Heterogeneous Treatment Effects (2020) · cites this paper as Bajari et al. (2012)
In the citing paper
“This regression is similar to Regression 2 with controls, except that it has several treatment variables.”
From Two-Way Fixed Effects Estimators with Heterogeneous Treatment Effects (2020) · cites this paper as Bajari et al. (2012)
In the citing paper
“This is a sharp design.”
From Two-Way Fixed Effects Estimators with Heterogeneous Treatment Effects (2020) · cites this paper as Bajari et al. (2012)
Citations
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Cited by
Sorted by citations
Two-Way Fixed Effects Estimators with Heterogeneous Treatment Effects
de Chaisemartin, C., & D’Haultfœuille, X. (2020) · American Economic Review · doi:10.1257/aer.20181169 · Cited by 5,031
Two-way Fixed Effects Estimators with Heterogeneous Treatment Effects
de Chaisemartin, C., & D'Haultfoeuille, X. (2019) · doi:10.3386/w25904 · Cited by 350
Metadata
- Authors
- Bajari, P., Fruehwirth, J. C., Kim, K. I., & Timmins, C.
- Affiliations
- University of Minnesota (US)
- University of Cambridge (GB)
- Duke University (US)
- Venue
- American Economic Review
- Publisher
- American Economic Association
- Published
- 2012-08-01
- Volume
- 102
- Issue
- 5
- Pages
- 1898-1926
- ISSN
- 0002-8282 (ISSN-L)
- OpenAlex
- W2128480820
- Cited by
- 170
- References
- 1
- Citations by year
- 2026: 8 · 2025: 14 · 2024: 12 · 2023: 9 · 2022: 19 · 2021: 12 · 2020: 15 · 2019: 13 · 2018: 17 · 2017: 15 · 2016: 13 · 2015: 4 · 2014: 4 · 2013: 13 · 2012: 2
- FWCI
- 17.61
- Type
- journal article
- Language
- en
- Open access
- closed
- Locations
- American Economic Review (publishedVersion)
- RePEc: Research Papers in Economics (submittedVersion)
- Topics
- Social Sciences › Economics, Econometrics and Finance › Economics and Econometrics › Housing Market and Economics
- Social Sciences › Economics, Econometrics and Finance › Economics and Econometrics › Economic and Environmental Valuation
- Physical Sciences › Energy › Renewable Energy, Sustainability and the Environment › Energy, Environment, and Transportation Policies
- Keywords
- hedonic pricing, rational expectations, willingness to pay, air pollution, criteria pollutants, housing prices, neighborhood characteristics
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- The paper
- Bajari, P., Fruehwirth, J. C., Kim, K. I., & Timmins, C. (2012). A Rational Expectations Approach to Hedonic Price Regressions with Time-Varying Unobserved Product Attributes: The Price of Pollution. American Economic Review. https://doi.org/10.1257/aer.102.5.1898
