Working Paper

Do Discrete Choice Approaches to Valuing Urban Amenities Yield Different Results Than Hedonic Models?

Feb 8, 2018 | Paramita Sinha, Martha L. Caulkins, Maureen L. Cropper

Summary

Valuing climate amenities using a discrete model of household location choice results in greater values for warmer winters and cooler summers than a hedonic model.

Key Findings

  • Using a discrete location choice model, the mean value of a one-degree increase in winter temperature is four times greater than when using a hedonic model.
  • The mean value of a one-degree decrease in summer temperature is twice as great using the discrete choice approach.
  • The discrete choice approach finds that people who live in warm climates value warmer winters more than people living in cold climates.
  • Differences in estimates are due to different assumptions about moving costs, national labor and housing markets, and market shares.

Abstract

Amenities that vary across cities are typically valued using either a hedonic model, in which amenities are capitalized into wages and housing prices, or a discrete model of household location choice. In this paper, we use the 2000 Public Use Microdata Sample (PUMS) to value climate amenities using both methods. We compare estimates of marginal willingness to pay (MWTP), first assuming homogeneous tastes for climate amenities and then allowing preferences for climate amenities to vary by location. We find that mean MWTP for warmer winters is about four times larger using the discrete choice approach than with the hedonic approach; mean MWTP for cooler summers is twice as large. The two approaches also differ in their estimates of taste sorting. The discrete choice model implies that households with the highest MWTP for warmer winters locate in cities with the mildest winters, while the hedonic model does not. Differences in estimates are due to three factors: (1) the discrete choice model incorporates the psychological costs of moving from one’s birthplace, which the hedonic models do not; (2) the discrete choice model allows for city-specific labor and housing markets, rather than assuming a national market; (3) the discrete choice model uses information on market shares (i.e., population) in estimating parameters, which the hedonic model does not.