Laura O. Taylor

The Hedonic Method

Heterogeneous or differentiated goods are products whose characteristics vary in such a way that there are distinct product varieties even though the commodity is sold in one market (e.g., cars, computers, houses). The variation in product variety gives rise to variations in product prices within each market. The hedonic method for non-market valuation relies on market transactions for these differentiated goods to determine the value of key underlying characteristics. For instance, by observing the price differential between two product varieties that vary only by one characteristic (e.g., two identical cars, but with one having more horsepower than the other), we indirectly observe the monetary trade-offs individuals are willing to make with respect to the changes in this characteristic. As such, the hedonic method is an “indirect” valuation method in which we do not observe the value consumers have for the characteristic directly, but infer it from observable market transactions.

On Behavioral-Environmental Economics

Traditional environmental and resource economics uses rational choice theory to guide the evaluation of alternative policy options to correct market failure. Behavioral economics, however, has challenged this conventional mindset by showing how people frequently make choices and state values that deviate from the presumption of rationality, i.e., behavioral failures. This article explores the potential of behavioral economics to advance the science of environmental and resource economics. We address four questions: (1) How can behavioral failures affect thinking about environmental policy? (2) When are behavioral failures relevant to the science of environmental economics? (3) Is behavioral failure just another form of market failure? (4) Do we have a new behavioral-environmental second best problem? We conclude that the evidence from behavioral economics remains insufficient to support the wholesale rejection of rational choice theory within environmental and resource economics. But this does not mean anomalous behavior is non-existent; natures goods and services frequently lack the active market-like arbitrage needed to encourage consistent and rational choice. We believe it is crucial to identify the economic circumstances, institutional designs, and social contexts in which rational choice theory works and those where it fails to capture observed behavior.

Objective versus Subjective Measures of Water Clarity in Hedonic Property Value Models

This paper examines and compares objective, scientific measures of environmental quality with subjective measures of individuals’ perceptions obtained from survey information within the context of hedonic property value models. The specific application is to water clarity of freshwater lakes in Maine. Non-nested, J-test results indicate that the objective measure of water clarity was either preferred, or equally preferred, to the subjective measure for explaining variation in sale prices. These results are promising for hedonic applications employing scientific measures of environmental quality, however robustness of these results to other environmental amenities, and more complex environmental quality measuresare of course needed. (JEL Q25)

Externality effects of small-scale hazardous waste sites: evidence from urban commercial property markets

Abstract Studies have found that severely contaminated properties, such as those on the U.S. EPAs National Priority List (NPL), reduce the value of nearby single-family homes. However, the vast majority of hazardous waste sites (HWS) are not so severely contaminated as those on the NPL. We also know little about HWS effects on other land-uses such as commercial and industrial properties, which may be of greater interest since these properties are more likely to be located near contaminated sites. Using data for Atlanta, Georgia, HWS are found to negatively affect the market value of nearby commercial and industrial properties. Although none of the HWS in this study are on the NPL, their impacts are estimated to be quite substantial in magnitude. Estimates of the total value losses caused by many of the sites are sufficiently large relative to the cost of remediation to justify tax-increment financing as a clean-up option.

Do As You Say, Say As You Do: Evidence On Gender Differences In Actual And Stated Contributions To Public Goods

Recent work on public goods contributions has examined the relationship between gender and free-riding behavior in studies using laboratory public goods. This research furthers this line of inquiry by examining gender as a possible explanation of hypothetical bias, which occurs in valuation studies using real world public goods. Results show that gender differences exist in hypothetical valuation exercises, but not in real valuation exercises. Further, the results show that hypothetical bias is almost three times larger for males than for females, an important result for researchers investigating the source of, and solutions for, hypothetical bias. Keyword(s): Public goods valuation; Gender; Contingent valuation; Experimental economics

Theoretical Foundations and Empirical Developments in Hedonic Modeling

Although hedonic analyses have been reported as far back as Waugh’s (1928) analysis of agricultural markets, it was Rosen’s (1974) seminal work that began a rich theoretical and empirical literature exploring the role of housing attributes in consumer decision making. Housing choice not only confers to the owner/renter consumption of property and structural housing characteristics, but consumption of all location characteristics of the property such as proximity to environmental amenities and disamenities. As such, observed choices over housing reveals to the researcher information about the underlying preferences for these amenities or other characteristics of interest. In this chapter, we review the hedonic model as developed by Rosen as well as recent theoretical and empirical developments in hedonic modeling.2

Induced-value tests of the referendum voting mechanism

Abstract An induced-value laboratory experiment is conducted testing the incentive compatibility of the referendum voting mechanism for eliciting willingness to pay for public goods. Although errors were observed at the individual level, aggregate results suggest incentive compatibility in both hypothetical and real referenda.

Environmental amenities as a source of market power.

Site-specific environmental amenities can provide a source of product-differentiating market power. Using estimates from hedonic-price equations and residual-demand models, our analysis recovers firm-specific estimates of price markups as measures of market power, and uses these markups to estimate the implied marginal value for access to coastal beaches. The application involves rental price and occupancy data for several thousand beach properties along a portion of the North Carolina coastline during the 1987 to 1992 rental seasons.

ESTIMATING THE VALUE OF WATER USE PERMITS: A HEDONIC APPROACH APPLIED TO FARMLAND IN THE SOUTHEASTERN US

In the State of Georgia, any agricultural producer who wishes to pump more than 100,000 gallons of water a day for crop irrigation is required to have an irrigation permit. The permit stays with the land and in the event of sale the permit is transferred with the property. Until recently, permits were essentially granted freely to all applicants in the Flint River water basin, without limit. In 1999, however, with increasing demand for water from growing urban Atlanta and several years of drought in the Southeast, the state of Georgia placed a moratorium on the issuance of agricultural water permits in the Flint River basin. This research exploits this policy change within a hedonic pricing framework to estimate the value of irrigation rights in the Southeast US. While the value of irrigation rights has been studied extensively in the western US, differences in property rights and legal regimes, as well as a lack of established water-rights markets in the East, leave us with little information regarding the value of irrigation rights in this setting.

Incentive Compatible Referenda and the Valuation of Environmental Goods

Recent attempts to test the validity of the contingent valuation method have relied on laboratory-type experiments. In these experiments, willingness to pay responses in hypothetical choice experiments are compared with responses from choice experiments requiring actual payments. Often evidence of hypothetical bias is found. Critical for these experimental tests of hypothetical surveys is that the methodology used to elicit willingness to pay from subjects in the real-payment experiment be demand revealing. If it is not, then differences in responses to hypothetical and real valuation questions could be due to free-riding in the real-payment survey and not due to hypothetical bias in the hypothetical survey. This paper reports on experiments that implement a theoretically incentive-compatible revelation mechanism (a closed referendum) to elicit responses to valuation questions in both hypothetical and real experiments. As in earlier studies, evidence of an upward hypothetical bias is found.