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Hedonism vs. Hihilism: 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.

Suggested Citation

  • Berliant, Marcus & McMillen, Daniel P., 2003. "Hedonism vs. Hihilism: No Arbitrage and Tests of Urban Economic Models," Working Papers 1166, California Institute of Technology, Division of the Humanities and Social Sciences.
    • Handle: RePEc:clt:sswopa:1166
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    References listed on IDEAS

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    1. Fujita,Masahisa, 1991. "Urban Economic Theory," Cambridge Books, Cambridge University Press, number 9780521396455.
    2. Berliant, Marcus & Papageorgiou, Yorgos Y. & Wang, Ping, 1990. "On welfare theory and urban economics," Regional Science and Urban Economics, Elsevier, vol. 20(2), pages 245-261, September.
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    5. Scotchmer, Suzanne, 1986. "The short-run and long-run benefits of environmental improvement," Journal of Public Economics, Elsevier, vol. 30(1), pages 61-81, June.
    6. Kau, James B. & Sirmans, C. F., 1979. "Urban land value functions and the price elasticity of demand for housing," Journal of Urban Economics, Elsevier, vol. 6(1), pages 112-121, January.
    7. McMillen, Daniel P., 2003. "The return of centralization to Chicago: using repeat sales to identify changes in house price distance gradients," Regional Science and Urban Economics, Elsevier, vol. 33(3), pages 287-304, May.
    8. Deacon, Robert T & Sonstelie, Jon, 1985. "Rationing by Waiting and the Value of Time: Results from a Natural Experiment," Journal of Political Economy, University of Chicago Press, vol. 93(4), pages 627-647, August.
    9. McMillen, Daniel P., 1990. "Consistent estimation of the urban land value function," Journal of Urban Economics, Elsevier, vol. 27(3), pages 285-293, May.
    10. Coulson, N. Edward, 1989. "The empirical content of the linearity-as-repackaging hypothesis," Journal of Urban Economics, Elsevier, vol. 25(3), pages 295-309, May.
    11. Rosen, Sherwin, 1974. "Hedonic Prices and Implicit Markets: Product Differentiation in Pure Competition," Journal of Political Economy, University of Chicago Press, vol. 82(1), pages 34-55, Jan.-Feb..
    12. N. Edward Coulson, 1991. "Really Useful Tests of the Monocentric Model," Land Economics, University of Wisconsin Press, vol. 67(3), pages 299-307.
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    Cited by:

    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

    Keywords

    monocentic city; hedonic models; no arbitrage;
    All these keywords.

    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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