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Hedonism vs. nihilism: No arbitrage and tests of urban economic models

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  • Berliant, Marcus
  • McMillen, Daniel P.

Abstract

We present two notions of "no arbitrage" in urban economic models and show that there is no model satisfying both. The standard hedonic housing model of urban economics and its generalizations are consistent with the first of these, but inconsistent with the second. We present a model consistent with the second notion of "no arbitrage" and a continuum of models consistent with neither notion that are observationally equivalent to the standard model, even if the utility function of consumers is known. They generate the same equilibrium allocations and values of bundles purchased in equilibrium, but the equilibrium price functions differ on bundles not purchased in equilibrium. Only one of these is the standard model. Thus, the available tests of the standard model cannot provide much evidence of its validity.
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  • Berliant, Marcus & McMillen, Daniel P., 2006. "Hedonism vs. nihilism: No arbitrage and tests of urban economic models," Regional Science and Urban Economics, Elsevier, vol. 36(1), pages 118-131, January.
    • Handle: RePEc:eee:regeco:v:36:y:2006:i:1:p:118-131
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    1. Coulson, N. Edward & Li, Herman, 2010. "The effect of risk on the effect of a land tax: A simulation," Regional Science and Urban Economics, Elsevier, vol. 40(6), pages 530-537, November.

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    More about this item

    JEL classification:

    • R21 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Household Analysis - - - Housing Demand
    • R13 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General Regional Economics - - - General Equilibrium and Welfare Economic Analysis of Regional Economies
    • D41 - Microeconomics - - Market Structure, Pricing, and Design - - - Perfect Competition
    • C21 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Cross-Sectional Models; Spatial Models; Treatment Effect Models

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