State of the Art of Hedonic Pricing

Hedonic pricing methods have become a staple in the environmental economist’s toolkit for conducting nonmarket valuation. The hedonic pricing method (HPM) is a revealed preference approach used to indirectly infer the value buyers and sellers place on characteristics of a differentiated product. Environmental applications of the HPM are typically focused on housing and labor markets, where the characteristics of interest are local environmental commodities and health risks. Despite the fact that there have been thousands of hedonic pricing studies published, applications of the methodology still often grapple with issues of omitted variable bias, measurement error, sample selection, choice of functional form, effect heterogeneity, and the recovery of policy-relevant welfare estimates. Advances in empirical methodologies, increased quality and quantity of data, and efforts to link empirical results to economic theory will surely further the use of the HPM as an important nonmarket valuation tool.