Ranking quality of life using subjective well-being data

Indices ranking the quality of life in cities based on climatic, environmental and urban conditions have a long tradition in the hedonic literature. In this paper we propose an alternative set of indices based on subjective well-being (SWB) data linked to regional level amenities. SWB indicators provide a direct, self-reported evaluation of life satisfaction and can be used to rank quality of life among different locations in the absence of data on housing prices and wages. Using SWB data in Ireland, we show how to rank quality of life in regions in three different ways: 1) using a simple unconditional average of SWB across locations, 2) conditionally, controlling for personal characteristics of individuals and the environmental amenities in their area and 3) weighting the environmental endowments in each location by the marginal rate of substitution between income and the amenity. The results show a very high correlation between the three indices and suggest that variation in SWB across locations is not random, but is driven to a large extent by the endowment of location-specific amenities across locations.     

Using stochastic frontier models to mitigate omitted variable bias in hedonic pricing models: A case study for air quality in Bogotá, Colombia

Hedonic pricing models use property value differentials to value changes in environmental quality. If unmeasured quality attributes of residential properties are correlated with an environmental quality measure of interest, conventional methods for estimating implicit prices will be biased. Because many unmeasured quality measures tend to be asymmetrically distributed across properties, it may be possible to mitigate this bias by estimating a heteroskedastic frontier regression model. This approach is demonstrated for a hedonic price function that values air quality in Bogotá, Colombia.     

Efficiency in an Economy with Fixed Costs

It is by now well known that in an economy with increasing returns, first-best efficiency may be impossible to attain through an equilibrium concept based on market prices, even if firms are regulated to follow marginal cost pricing. We examine the efficiency issue in a special but important class of economies in which the only source of nonconvexities is the presence of fixed costs. Even in this context, it is possible that none of the equilibria based on marginal cost pricing are efficient (unless additional, strong assumptions are made). We argue that available results on the existence of an efficient two-part tariff equilibrium rely on very strong assumptions, and we provide a positive result using a weak surplus condition. Our approach can also be used to establish the existence of an efficient marginal cost pricing equilibrium with endogenously chosen lump-sum taxes if the initial endowment is efficient in the economy without the production technology.     

The possibility of mixed-strategy equilibria with constant-returns-to-scale technology under Bertrand competition

Abstract. We analyze the Nash equilibria of a standard Bertrand model. We show that in addition to the marginal-cost pricing equilibrium there is a possibility for mixed-strategy equilibria yielding positive profit levels. We characterize these equilibria and find that having unbounded revenues is the necessary and sufficient condition for their existence. Hence, we demonstrate that under realistic assumptions the only equilibrium is marginal-cost pricing.     

Beyond implicit prices: recovering theoretically consistent and transferable values for noise avoidance from a hedonic property price model

Using a two-stage hedonic pricing methodology we estimate a system of structural demand equations for different sources of transport-related noise. In the first stage, we identify market segments using model-based clustering techniques and estimate separate hedonic price functions (HPFs) for each segment. In so doing, we show how a semiparametric spatial smoothing estimator outperforms other standard specifications of the HPF. In the second stage, we control for non-linearity of the budget constraint and identify demand relationships using techniques that account for problems of endogeneity and censoring of the dependent variable. Our estimated demand functions provide welfare estimates for peace and quiet that we believe to be the first derived from property market data in a theoretically consistent manner.      

Leave it in the ground? Oil sands development under carbon pricing

We evaluate the impact of internalizing the carbon emissions externality on new oil sands projects. Using data from recent oil sands projects and estimates of both the social costs of carbon and carbon prices consistent with meeting global climate change targets, we estimate the potential impact of action on climate change on the economic viability of oil sands investments. Our results indicate that oil sands are a marginal resource before they incur any carbon costs. Incorporating carbon costs, we find that the viability of oil sands depends on the coverage of carbon pricing across the life cycle emissions from oil sands and on the equilibrium incidence of carbon prices on producers. We show an important interaction between resource royalties and carbon charges that implies that the impact carbon pricing depends on not only the stringency and coverage of the carbon price but also its point of application of a carbon price. Finally, we explore the potential for technological change to mitigate the impacts of carbon pricing on oil sands investment viability.     

Understanding Price Variation Across Stores and Supermarket Chains: Some Implications for CPI Aggregation Methods

The empirical literature on price indices consistently finds that aggregation methods have a considerable impact, particularly when scanner data are used. This paper outlines a novel approach to test for the homogeneity of goods and hence for the appropriateness of aggregation. A hedonic regression framework is used to test for item homogeneity across four supermarket chains and across stores within each of these supermarket chains. We find empirical support for the aggregation of prices across stores which belong to the same supermarket chain. Support was also found for the aggregation of prices across three of the four supermarket chains.     

Art in Africa: Hedonic price analysis of the South African fine art auction market, 2009–2014

Real asset markets are characterized by illiquidity and heterogeneous assets, presenting challenges to price estimators. Use of a new dataset of 7,553 auction fine art lots brought to market in South Africa, for 2009–14, allows us to examine the full sales hedonic price estimator over a wide set of characteristics. Results validate full sale hedonic pricing: Identities of artists, medium and genre, dating characteristics, and physical characteristics of artwork are significant. External validity of hedonic pricing is supported by out-of-sample price prediction for 40 individual artists. Auction house catalogue presentation of art work also proves correlated with realized auction prices. Art as an asset finds support: art prices move countercyclically with GDP and domestic equity markets, pro-cyclically with off-shore equity markets, implying a risk diversification role. JEL Codes: D1, L8. Keywords: hedonic price equation, art market, South Africa Word Count: 9467 (including all Tables, Figures, References).     

What Are the Benefits of the Water Framework Directive? Lessons Learned for Policy Design from Preference Revelation

The Water Framework Directive (WFD) seeks to achieve good ecological status of surface waters across the European Union by 2027. The WFD guidelines explicitly recognize the economics of water management by providing exceptions to water areas with disproportionately high restoration costs. This calls indirectly for estimations of benefits lost due to non-attainment. We employ a hedonic property pricing approach on waterfront recreational properties to estimate the welfare impacts of attaining the good ecological status described by the WFD. The empirical challenge is that the quality measure proposed by the WFD specifically denotes ecological quality, whereas economically measurable water quality values are heavily dependent on recreation impacts. Intuitively, the choice of water quality measure should have an effect on estimating the value of water quality. Our data provide a unique chance to compare three alternative indicators of water quality: (1) a usability-based index, (2) subjectively reported measure and (3) the ecological status determined by the WFD. We find that an improvement in water quality is associated with a statistically significant, non-linear change in recreational property values. We show how the ecological status compares with the other two indicators, and discuss the justifiability of using revealed preference methods when the valued good is defined purely on the basis of ecological criteria.     

Electricity supply preferences in Europe: Evidence from subjective well-being data

We use survey data for 139,517 individuals in 25 European countries, 2002–2011, to estimate the relationship between subjective well-being (SWB) and production shares of various electricity generation technologies. The estimated relationships are taken to represent preference relationships over attributes of electricity supply systems (costs, safety, environmental friendliness, etc.). Controlling for a variety of individual and macro-level factors, we find that individuals’ SWB varies systematically and significantly with differences in the electricity mix across countries and across time. Among other results, we find that a greater share of solar & wind power relative to nuclear power and electricity from coal and oil is associated with greater SWB at all levels of income and that the implied preference for solar & wind power over nuclear power has risen drastically after the Fukushima nuclear accident.     

A flexible approach to estimate the equity premium

In this article, we estimate the risk aversion for households accounting for their lifetime consumption risk. Households take into account the overall lifetime uninsured consumption risk when optimizing their resources, which based on micro data varies across households. Thus, representing households’ consumption by merging cross-sectional micro data into the single Euler equation (the common approach for estimating risk aversion based on consumption-based asset pricing theory) may be too rough an approximation, leading to biased results with respect to risk aversion. Our results suggest that consumption-based asset pricing models that were rejected in several studies do in fact fit the data when we account for households’ lifetime consumption risk. This finding also has implications for long-run aggregate consumption-based asset pricing models.     

Sustainability impacts of car road pricing: A computable general equilibrium analysis for Austria

Nationwide car road pricing schemes are discussed across Europe. We analyse the impacts of such schemes with respect to environmental, economic and social indicators of sustainability, also quantifying the trade-offs among these three dimensions under different charging principles and revenue recycling options. In our analysis we employ a computable general equilibrium (CGE) approach, develop a modelling structure for private transport and provide detailed empirical analysis for the case of Austria. Regarding the social dimension, it has often been argued that poorer households (and commuters) would have to bear a disproportionate share of the road pricing burden. We find the contrary, i.e. a stronger negative policy impact on richer households, and on a small group of intensive car users. The choice of revenue recycling is able to ameliorate the negative social and economic effects of road pricing, without reversing the desired positive environmental effects. For political feasibility, questions of distributional impacts are most urgent and therefore we address them systematically within a quantitative framework.     

The Economic Analysis of Industrial Accidents: a re-assessment

Conventional economic approaches to the analysis of industrial accidents utilise the hedonic pricing approach. This approach usually excludes potentially important institutional, sociological and macroeconomic determinants of occupational safety. Initially we identify some of the theoretical and empirical problems with orthodox economic analysis in this area. An alternative model is then formulated which explicitly encompasses a broader range of determinants. Finally, the model is tested using UK industry accident data, the results being inconsistent with the compensating differentials' emphasis of orthodox analysis but supportive of the augmented model.     

Risk and Information: a Hedonic Price Study in the New Zealand Housing Market*

This paper employs the hedonic price approach developed by Rosen (1974) and recently extended to study the effects of potential natural hazards on consumer behaviour. Hedonic prices are used to estimate home buyers' willingness to pay to avoid a high-pressure gas pipeline installed in a residential area Studies of risk and information (e.g. Brookshire et al., 1985, Smith and Johnson, 1988) suggest that the subjective probability of a hazard occurring differs from the objective probability. If we allow for this, and relax the assumption of full information on the part of home buyers, our theoretical analysis indicates that a single hedonic price is not sufficient because hedonic prices are likely to change with a change in information. Our empirical analysis of cross-sectional data across time is in accord with the theoretical model, although not highly significant     

Dominant Firm Pricing with Competitive Entry and Regulation: The Case of IntraLATA Toll

In this paper, we develop a generalized model of a dominant firm-competitive fringe industry in which products are differentiated, costs vary across suppliers, and the dominant firm is subject to alternative regulatory regimes. The model yields an equilibrium condition that can be tested empirically using data on Bell Operating Companies' pricing of intraLATA toll telephone service. Estimation of a reduced form price equation provides strong support for the theoretical model. Of particular interest, the results suggest that dominant firm (Bell Operating Company) toll prices are driven down by the presence of actual and potential fringe competitors (interexchange carriers) when entry is authorized by the state. Additionally, the results fail to provide evidence that the introduction of incentive regulation or price-cap regulation has reduced intraLATA toll prices.     

Chained,exact and superlative hedonic price changes: estimates from microdata

Scanner data are used to calculate chained, exact (and superlative) hedonic price indexes for television sets. The data source is available for a wide range of goods, the application providing an example of how this method can be more widely applied. The indexes correspond to constant utility, hedonic cost-of-living indexes. The approach improves on the existing direct method, which takes its estimates directly from the coefficients on time dummies in a hedonic regression. It also improves on the matched model method used by statistical agencies. The differences between actual price changes and exact hedonic quality-adjusted price changes are found to be substantial. Base-period and current-period weighted exact hedonic indexes are similar, thus providing good approximations to a superlative index. Estimates from the direct, dummy variable approach were compared to the superlative indexes. The disparities between the results argue for caution in the use of the direct, dummy variable approach to estimating quality-adjusted price changes.     

Mean-reversion in closed-end fund discount: evidence from half-life

This article examines the mean-reversion properties of the discount on UK and US closed-end funds. While the discounts are tested I(1), strong statistical evidence of mean-reversion is ascertained by bias-corrected bootstrap half-life estimates. The estimates also indicate that equity-based funds converge to the steady-state level faster than fixed income funds. In addition, although an equilibrium pricing condition postulates an inverse relation between half-life and the discount size, correlation estimates fail to show strong support for the relation.     

Experienced versus decision utility: large-scale comparison for income–leisure preferences*

Subjective well-being (SWB) data are increasingly used to perform welfare analysis. Interpreted as “experienced utility”, it has recently been compared to “decision utility” using small-scale experiments most often based on stated preferences. We transpose this comparison to the framework of non-experimental and large-scale data commonly used for policy analysis, focusing on the income–leisure domain where redistributive policies operate. Using the British Household Panel Survey, we suggest a “deviation” measure, which is simply the difference between actual working hours and SWB-maximizing hours. We show that about three-quarters of individuals make decisions that are not inconsistent with maximizing their SWB. We discuss the potential channels that explain the lack of optimization when deviations are significantly large. We find proxies for a number of individual and external constraints, and show that constraints alone can explain more than half of the deviations. In our context, deviations partly reflect the inability of the revealed preference approach to account for labor market rigidities, so the actual and SWB-maximizing hours should be used in a complementary manner. The suggested approach based on our deviation metric could help identify labor market frictions.     

Hedonic prices and cost/benefit analysis

Hedonic prices have been used to evaluate the willingness to pay for attributes. We reformulate the notion of hedonic price from a composite price on housing to a unit price on traded quantities, in conformity with long run competitive equilibrium theory. This formulation was suggested (but not developed) by Rosen (J. Polit. Econ.82, No. 1 (1974), 34–35). By first characterizing an efficient allocation of consumers to space, we show that hedonic unit prices can be understood as a bid-rent function which supports the efficient allocation. This is despite the fact that the lots over which consumers bid are themselves endogenous. We show that unit hedonic prices reveal preferences in a manner different from composite hedonic expenditures.     

Cointegration relationships and hedonic pricing of differentiated commodities: an application to price dynamics in the US dairy sector

This study investigates the implications of hedonic pricing for price dynamics of differentiated commodities. A conceptual model of hedonic pricing is developed under a Leontief technology, showing how commodity prices reflect the underlying value of their components. Implications for the existence of cointegration relationships among commodity prices are derived. An application to the pricing and dynamics of selected US dairy commodities is presented. It provides evidence on the role of component valuation in the dynamics of dairy commodity prices in the short run as well as in the long run. Distinguishing between market regime and government regime (when the government price support is active), the analysis finds significant differences in dairy price dynamics between the two regimes.