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Fixed-effects versus peers: environmental valuation and omitted variable bias treatment in hedonic pricing

Author

Listed:
  • Jean Dubé
  • Sotirios Thanos

Abstract

A fine spatial scale is essential to the widely applied omitted variable bias (OVB) treatment of small-area fixed-effects (FEs) in Hedonic Pricing (HP). However, environmental amenity valuation is subsumed into the FEs when amenities vary at a coarser spatial scale. To recover amenity valuation while retaining the OVB treatment, we derive a novel “Differenced-Price-Peers” (DPP) specification by integrating HP and the prices and attributes of spatiotemporal peers. The close equivalence between small-area-FE-HP and DPP for spatial OVB treatment and amenity capitalization is demonstrated in a rich data context for the distance to the city center. Further evidence shows DPP to successfully recover aviation noise capitalization in a context of sparse housing data and anisotropic noise pollution where small-area-fixed-effects-HP fails. The noise discount of house prices is -0.71% per decibel in DPP, which is about 70% higher than the magnitude of the non-FEs HP suggesting potential undervaluation due to spatial OVB.

Suggested Citation

  • Jean Dubé & Sotirios Thanos, 2023. "Fixed-effects versus peers: environmental valuation and omitted variable bias treatment in hedonic pricing," ERES eres2023_70, European Real Estate Society (ERES).
    • Handle: RePEc:arz:wpaper:eres2023_70
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    File URL: https://eres.architexturez.net/doc/oai-eres-id-eres2023-70
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    More about this item

    Keywords

    aviation noise; Hedonic Pricing; Nearest Neighbors; Omitted Variable Bias;
    All these keywords.

    JEL classification:

    • R3 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location

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