Urban Complexity & Parameter Instability: Assessing Amenity Capitalization in the Presence of External Heterogeneity

Christian L. Redfearn

No 8563, Working Paper from USC Lusk Center for Real Estate

Abstract: In principle, spatial and temporal variations in the price of real estate within anurban area offer an excellent source of data with which any number of economic orpolicy questions might be addressed. Be it the value of proximity to public goods {schools, parks, pollution, etc. { or proximity to private goods { retail and consumptionactivities, for example { these locational amenities should be capitalized into propertyprices. It is on this premise that much of the empirical literature on access or proximityrests. Unfortunately, in a complex urban setting, common empirical approaches tomeasuring the value of proximity can be highly sensitive to choice of subsample and tothe parameterizations of proximity itself. This is a direct result of an urban contextin which distinct housing submarkets can exist even within small areas, variationsacross which swamp the relatively simple controls employed in traditional hedonicanalysis. This paper demonstrates that external heterogeneity significant complicatestraditional hedonic analysis and may preclude its use in complex urban land markets.In this setting, appeals to the Law of Large Numbers may be inappropriate. Thispaper reports the extent to which commonly-used empirical approaches produce widelyinconsistent estimates using the example of a valuation exercise of proximity to masstransit. The paper proposes a more robust approach that o®ers a greater degree ofconfidence in parameter estimates. In contrast to the instability of parameter estimatesunder traditional models, the more robust, nonparametric approach yields a consistentfinding of no significant capitalization of light rail into single-family home values.

Keywords: Urban Structure; neighborhood amenities; Public Goods (search for similar items in EconPapers)
Date: 2007
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