DO “CAPITALIZATION EFFECTS” FOR PUBLIC GOODS REVEAL THE PUBLIC'S WILLINGNESS TO PAY?

Nicolai V. Kuminoff and Jaren Pope

International Economic Review, 2014, vol. 55, issue 4, 1227-1250

Abstract: This article develops a welfare theoretic framework for interpreting evidence on the impacts of public programs on housing markets. We extend Rosen's hedonic model to explain how housing prices capitalize exogenous shocks to public goods and externalities. The model predicts that trading between heterogeneous buyers and sellers will drive a wedge between these “capitalization effects” and welfare changes. We test this hypothesis in the context of changes in measures of school quality in five metropolitan areas. Results from boundary discontinuity designs suggest that capitalization effects understate parents’ willingness to pay for public school improvements by as much as 75%.

Date: 2014
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