Graduate Thesis Or Dissertation

Estimation of implicit prices in hedonic price models : flexible parametric versus additive nonparametric approach

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  • This thesis contains two essays that use state-of-the-art econometric methods to estimate the implicit prices of various housing and vehicle attributes in hedonic price analysis. The additive nonparametric regression proposed by Hastie and Tibshirani (1990) is applied to capture a series of nonlinearities relating prices to their attributes that cannot be captured by conventional parametric approach. Due to its additive structure, the additive nonparametric regression retains an important interpretative feature of the linear model and avoids the drawbacks of a fully nonparametric design such as slow rates of convergence and the "curse of dimensionality." The "benchmark" parametric specification for the hedonic price function is carefully chosen via the estimation of the Box and Cox (1964) and Wooldridge (1992) transformations. The additive nonparametric model provides smaller price prediction errors than the benchmark parametric specification in standard goodness of fit measures. The first study examines the effects on housing prices of the structural and environmental attributes using residential sales data from Portland, Oregon. The overall estimation results verify that most housing attributes that are generally linked to the perception of quality, such as larger total structure square footage and higher elevation, have significant positive implicit prices. Attributes that reduce house quality, such as age of house and distance to environmental amenities, discount the value of a house. Complex price effects of various housing attributes are revealed by the additive nonparametric regression. The second study uses a hedonic price approach to estimate the effects on used car prices of vehicle emission attributes, such as hydrocarbon and carbon monoxide emissions, using data from the Vehicle Inspection Program in Portland, Oregon. The estimation results show that used car value is on average higher for vehicles with lower hydrocarbon and carbon monoxide emissions, ceteris paribus. This empirical finding is consistent with recent reports from the U.S. Environmental Protection Agency, which indicate that used vehicles failing to pass required emission tests face potentially high repair costs and frequent smog-check requirements. More cylinders and larger engine size are highly valued. Higher mileage receives relatively little discount compared to age of vehicle.
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