A Hedonic Approach
- New Horizons in Environmental Economics series
Chapter 3: Theory of Capitalization Hypothesis
3. Theory of capitalization hypothesis TWO TYPES OF CAPITALIZATION As we discussed in the previous chapter, the hedonic approach assumes that the consumer’s preferences of the attributes of a good are reﬂected in the price diﬀerences of goods. In other words, the value of attributes for the consumer is incorporated into the value of the price of a good. Then the value diﬀerences should result in the diﬀerent prices of a good. This phenomenon is called capitalization. We can see many examples of capitalization in the market. In the stock market, the future proﬁts of a company are capitalized into the stock price of the company. In a space market, such as a land or housing market, the future rent of a space is capitalized into the value of the space. In the labour market, the value of the skill of a worker should be capitalized into the wages of the worker. A cost should also be capitalized into the prices. For example, future property taxes should reduce the value of space (land, housing), that is, the tax is negatively capitalized into the value of space (land or housing). If the rate of the property tax is diﬀerent from city to city, then the space (land or housing) price diﬀerence among these cities should reﬂect the rate diﬀerence (on capitalization, see Oates, 1969; Starrett, 1981, 1988; among others). From this discussion, we can understand that there are two types of capitalization....
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