by P Bayer, N Keohane, C Timmins
Journal of Environmental Economics and Management 58:1-142009
Hedonic models often overlook mobility costs and assume that people can move freely among locations when purchasing homes or selecting jobs. This assumption can lead to biased estimates of marginal willingness to pay (MWTP) for local amenities. This paper assesses how mobility constraints inhibit the use of conventional wage-hedonic techniques when estimating household MWTP for local improvement in air quality. To determine the advantage of living in individual metropolitan areas across the United States for the years 1990 and 2000, the authors developed and utilized a discrete-choice model based on residential patterns in conjunction with a flexible model of migration costs. Incorporating the contribution of distant sources to local air pollution allowed the authors to estimate the MWTP for a reduction in air pollution. The results revealed that when accounting for migration costs, estimates of MWTP are more than three times as large as estimates from a conventional model. This finding provides evidence that the conventional approach, which disregards migration costs, grossly underestimates the true MWTP for air quality. An accurate estimation of the economic value of air quality improvements is essential for policy makers, such as the US Environmental Protection Agency, for adequate regulation of air pollution. This research suggests that the true value of clean air may be substantially greater than previously recognized and highlights the importance of integrating mobility constraints into hedonic models.