Estimating the housing production function with unobserved land heterogeneity

Yusuke Adachi

Papers from arXiv.org

Abstract: This paper develops a method for estimating housing production functions when builders choose capital after observing local conditions that are unobserved by the econometrician. Because observed capital variation reflects both technological substitution and endogenous responses to these conditions, existing estimators can transmit unobserved heterogeneity into the estimated production function. The method treats the unobserved local conditions that affect capital choice as a scalar Markov state and combines the capital share equation with Markov moments implemented using repeated cross-sectional construction data. Monte Carlo simulations and an application to newly constructed housing in Tokyo's 23 special wards show that accounting for this heterogeneity changes estimated capital-land elasticities and yields elasticities close to constant returns to scale.

Date: 2025-04, Revised 2026-05
New Economics Papers: this item is included in nep-dcm, nep-ecm, nep-eff and nep-ure
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