What Do Property Values Really Tell Us? Evidence From Revealed and Stated Preference Studies

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In the absence of markets for environmental quality, researchers resort to stated and revealed preference techniques to estimate the benefits of environmental programs. One of the most widely used revealed preference approaches is hedonic property value models, where the value of an environmental commodity is inferred from its impact on home prices. There are, however, two practical issues in obtaining valid welfare estimates. The first is omitted variable bias, where the estimated impacts are confounded by omitted characteristics of the housing bundle. The second is whether the measure of environmental quality assumed in the hedonic models is the one that buyers and sellers in the market are aware of, and care about.

Stated preference approaches offer an opportunity to examine and, in some cases, circumvent these issues. I present three studies exploring the use of hedonic and stated preference methods in estimating the impacts of environmental disamenities on home values. The first study is an extensive hedonic analysis of leaking underground storage tanks (LUSTs). I construct a quasi experiment and implement several econometric techniques to address omitted variable bias, paying special attention to alternative environmental quality measures.

I then present two stated preference studies, where the disamenities are conveyed using clearly specified quantitative measures. The first study focuses on LUSTs and groundwater pollution, which is expressed as parts-per-billion of benzene. This reflects the actual information given to households in the hedonic study. The second stated preference study asks respondents to choose among hypothetical homes, which vary in terms of price and mortality risks associated with local air pollution.

In my hedonic application I find that LUSTs generally have little effect on home values. I argue that this is because people typically do not have much information regarding this disamenity. This conjecture is confirmed by the significant depreciation at homes where households are well informed, as well as in the stated preference studies, where respondents are informed as part of the study design. While hedonics is a useful non-market valuation tool, in some applications pursuing both approaches may help us more accurately estimate the benefits of environmental programs.