Discrete Choice and Hedonics: Identification, Estimation, and Application to Housing and New Goods

Stanford University, Stanford CA

Investigators

Abstract

There are two primary goals for this research project. First, the project derives new methods for iden-tification and estimation of random coefficient discrete choice models, focusing particularly on discrete choice models with a finite dimensional error term sometimes called "pure hedonic" models. Such models are superior economic models with which to an-alyze the effects of a policy change. Second, these new methods are applied to two important empirical applications: an analysis of housing choice and new housing policy, and measurement of the welfare gains to individuals from recent innovation in personal computers. Besides improving the theoretical economic properties of the model, these econometric methods have two distinct advantages over existing methods. The project develops a new identification strategy, using a hedonic pricing equation, which does not require the instruments that have been widely used in the recent literature. In order to achieve identification, the recent literature has typically made the assumption that observable product characteristics are uncorrelated with unobserv-able product characteristics. Such an assumption is in conflict with a long run equilibrium in which firms optimally choose their products' characteristics conditional on the characteristics of their rivals' products. Because the pricing equation is used to identify unobserved product characteristics, it can then be used for individual utility maximization to nonparametrically identify individual taste coefficients. Recovery of individual random coefficients is important because it allows the researcher to evaluate the distributional consequences of a policy change, and because it provides for a richer aggregate demand system. These techniques are used to evaluate important empirical questions in two industries. The first industry considered is housing. Specifically, the analysis of Bajari and Kahn (2000) is extended to address the question of why racial segregation persists. The project also studies current housing policy, specifically the question of where to locate new public housing units. Second, individual welfare from innovation in personal computers is measured over the last decade. Our approach is well suited to this problem because of its emphasis on individual heterogeneity. In particular, the investigators are able to break out the source of consumer welfare gains (e.g., product quality versus product price) and the distribution of welfare gains across different groups of individuals, evaluating such questions as a precise measurement of the form and extent of the "digital divide". The investigators also revisit the important issue of how to construct an ideal price index for an industry with rapid quality change like computers.