Edited by Bruce L. Benson and Paul R. Zimmerman
Keith Ihlanfeldt and Tom Mayock INTRODUCTION Maintaining public safety is a major responsibility of local governments that accounts for a significant percentage of their budgets.1 To spend these dollars most effectively, reliable estimates of the costs of crime are needed to guide policy decisions. Unfortunately, this has proven to be a difficult task, principally because public safety (i.e. the absence of crime) is a non-market good, whose price can only be estimated implicitly. Typically, the market chosen to implicitly estimate the value of crime prevention is the housing market, where a hedonic price model is estimated that includes a measure of neighborhood crime among the regressors. The hedonic model approach to estimating the costs of crime is attractive theoretically. The seriousness that people attach to crime should be reflected in what they are willing to pay to live in a low-crime neighborhood. Moreover, by including crimes of different types in the hedonic model, their relative importance can be determined. However, a major difficulty arises in estimating the crime–housing price relationship; namely, the endogeneity of crime must be dealt with in order to obtain consistent estimates. While the endogeneity of crime is widely recognized, it is remarkable that of the 19 hedonic studies we were able to find that included crime as an explanatory variable, 13 treated crime as an exogenous variable. Of the six studies that do instrument crime, only two tested the validity of the instruments, and in one case an overidentification test rejected the exogeneity of the...
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