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

Jean Dubé and Sotirios Thanos

ERES from European Real Estate Society (ERES)

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.

Keywords: aviation noise; Hedonic Pricing; Nearest Neighbors; Omitted Variable Bias (search for similar items in EconPapers)
JEL-codes: R3 (search for similar items in EconPapers)
Date: 2023-01-01
New Economics Papers: this item is included in nep-env and nep-ure
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Persistent link: https://EconPapers.repec.org/RePEc:arz:wpaper:eres2023_70

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