Location Choice and the Value of Spatially Delineated Amenities

Abstract

<p>In the first chapter of this dissertation, I outline a hedonic equilibrium model that explicitly controls for moving costs and forward-looking behavior. Hedonic equilibrium models allow researchers to recover willingness to pay for spatially delineated amenities by using the notion that individuals "vote with their feet." However, the hedonic literature and, more recently, the estimable Tiebout sorting model literature, has largely ignored both the costs associated with migration (financial and psychological), as well as the forward-looking behavior that individuals exercise in making location decisions. Each of these omissions could lead to biased estimates of willingness to pay. Building upon dynamic migration models from the labor literature, I estimate a fully dynamic model of individual migration at the national level. By employing a two-step estimation routine, I avoid the computational burden associated with the full recursive solution and can then include a richly-specified, realistic state space. With this model, I am able to perform non-market valuation exercises and learn about the spatial determinants of labor market outcomes in a dynamic setting. Including dynamics has a significant positive impact on the estimates of willingness to pay for air quality. In addition, I find that location-specific amenity values can explain important trends in observed migration patterns in the United States.</p><p>The second chapter of this dissertation describes a model which estimates willingness to pay for air quality using property value hedonics techniques. Since Rosen's seminal 1974 paper, property value hedonics has become commonplace in the non-market valuation of environmental amenities, despite a number of well-known methodological problems. In particular, recovery of the marginal willingness to pay function suffers from important endogeneity biases that are difficult to correct with instrumental variables procedures [Epple (1987)]. Bajari and Benkard (2005) propose a "preference inversion" procedure for recovering heterogeneous measures of marginal willingness to pay that avoids these problems. However, using cross-sectional data, their approach imposes unrealistic constraints on the elasticity of marginal willingness to pay. Following Bajari and Benkard's suggestion, I show how data describing repeat purchase decisions by individual home buyers can be used to relax these constraints. Using data on ozone pollution in the Bay Area of California, I find that endogeneity bias and flexibility in the shape of the marginal willingness to pay function are both important.</p><p>Finally, in the third chapter of this dissertation, I combine the insights of the Bajari-Benkard inversion approach employed in second chapter with more standard estimation techniques (i.e., Rosen (1974)) to arrive at a new hedonic methodology that allows for flexible and heterogeneous preferences while avoiding the endogeneity problems that plague the traditional Rosen two-stage model. Implementing this estimator using the Bay Area ozone data, I again find evidence of considerable heterogeneity and of endogeneity bias. In particular, I find that a one unit deterioration in air quality (measured in days in which ozone levels exceed the state standards) raises marginal willingness to pay by $145.18 per year. The canonical two-stage Rosen model finds, counter-intuitively, that this same change would reduce marginal willingness to pay by $94.24.</p>