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Chapter 12: Preference Heterogeneity and Non-market Benefits: The Roles of Structural Hedonic and Sorting Models
H. Allen Klaiber and V. Kerry Smith* I INTRODUCTION Simple descriptions of the equilibria we attribute to ideal markets make it easy to overlook the complexities underlying these outcomes. Aggregate demand and supply functions do not require the micro elements of each function’s characterization of a component of the market’s interactions to be known in order for the aggregate structure to be identified. Our ideal market metaphor, for a simple, identical commodity, assures that price signals harmonize heterogeneous agents’ behaviour. When we relax these assumptions, as would be routine for environmental applications that exploit spatial heterogeneity in the non-market attributes of locations, the models must describe more fully the interactions that give rise to equilibria with heterogeneous goods and agents. The hedonic model has been the ‘workhorse’ for these situations.1 As Rosen (1974) first described the model, markets seemed capable of revealing a great deal of information about preferences. Few analysts would debate that what seemed to be a simple estimation task in using the hedonic model for applications with housing prices, turned out to be much more complex. As a result there has been an explosion of literature on hedonic and structural models for describing heterogeneous households’ choices. The latter models exploit the heterogeneity in household preferences as well as the properties implied by a sorting equilibrium. Incorporating features of the sorting equilibrium in the estimation process has allowed these models to be used for a type of general equilibrium policy analysis where households re-sort following exogenous interventions. These...
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