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Revisiting the hedonic price method to assess the implicit price of environmental quality with market segmentation

Author

Listed:
  • Marc Baudry
  • Masha Maslianskaia-Pautrel
Abstract
The article highlights the role of heterogeneity in the formation of hedonic prices. The article distinguishes between continuous and groupwise heterogeneity. The distinction helps understanding two important points. First, the analysis of market equilibrium with groupwise heterogeneity makes explicit the role of participation and incentives compatibility constraints for groups of buyers. The case of continuous heterogeneity may be thought of as a limit case of groupwise heterogeneity when the number of groups goes to infinity and their masses go to zero. The hedonic price curve is then obtained as the solution of a differential equation resulting from a market clearing condition. Second, the article outlines that submarkets emerge from market equilibrium only in the case of groupwise heterogeneity. The existence of submarkets means that the hedonic price function is continuous but the implicit price of characteristics is discontinuous at endogenous threshold values separating submarkets. Major implications for the valuation of environmental quality follow on. Based on numerical simulations, the article gives some insights into the way significant biases and drawbacks in the estimation of the implicit price of environmental quality can arise if the usual two steps procedure is implemented.

Suggested Citation

  • Marc Baudry & Masha Maslianskaia-Pautrel, 2012. "Revisiting the hedonic price method to assess the implicit price of environmental quality with market segmentation," EconomiX Working Papers 2012-45, University of Paris Nanterre, EconomiX.
    • Handle: RePEc:drm:wpaper:2012-45
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    References listed on IDEAS

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    Cited by:

    1. Masha Maslianskaia-Pautrel, 2013. "Hedonic Model with Discrete Consumer Heterogeneity and Horizontal Differentiated Housing," CEEES Paper Series CE3S-03/13, European University at St. Petersburg, Department of Economics.
    2. Masha Maslianskaia-Pautrel, 2012. "Hedonic model of segmentation with horizontal differentiated housing," TEPP Working Paper 2012-03, TEPP.

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    More about this item

    Keywords

    Environmental valuation; discrete heterogeneity; hedonicmodeling; vertical differentiation;
    All these keywords.

    JEL classification:

    • R21 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Household Analysis - - - Housing Demand
    • R31 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location - - - Housing Supply and Markets
    • Q51 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Valuation of Environmental Effects

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