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Hedonism vs. Hihilism: No Arbitrage and Tests of Urban Economic Models

Marcus Berliant () and Daniel McMillen ()

No 1166, Working Papers from California Institute of Technology, Division of the Humanities and Social Sciences

Abstract: We present two notions of "no arbitrage" in urban economic models and show that there is no model satisfying both. The standard hedonic housing model of urban economics and its generalizations are consistent with the first of these, but inconsistent with the second. We present a model consistent with the second notion of "no arbitrage" and a continuum of models consistent with neither notion that are observationally equivalent to the standard model, even if the utility function of consumers is known. They generate the same equilibrium allocations and values of bundles purchased in equilibrium, but the equilibrium price functions differ on bundles not purchased in equilibrium. Only one of these is the standard model. Thus, the available tests of the standard model cannot provide much evidence of its validity.

Keywords: monocentic city; hedonic models; no arbitrage (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-geo
Date: 2003-05
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Journal Article: Hedonism vs. nihilism: No arbitrage and tests of urban economic models (2006) Downloads
Working Paper: Hedonism vs. Nihilism: No Arbitrage and Tests of Urban Economic Models (2005) Downloads
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