"Hedonic adjustment" redirects here. Not to be confused with Hedonic adaptation.
In economics, hedonic regression, also sometimes called hedonic demand theory, is a revealed preference method for estimating demand or value. It decomposes the item being researched into its constituent characteristics, and obtains estimates of the contributory value for each. This requires that the composite good (the item being researched and valued) can be reduced to its constituent parts and that those resulting parts are in some way valued by the market. Hedonic models are most commonly estimated using regression analysis, although some more generalized models such as sales adjustment grids are special cases which do not.
An attribute vector, which may be a dummy or panel variable, is assigned to each characteristic or group of characteristics. Hedonic models can accommodate non-linearity, variable interaction, and other complex valuation situations.
Hedonic models are commonly used in real estate appraisal, real estate economics and Consumer Price Index (CPI) calculations. In CPI calculations, hedonic regression is used to control the effect of changes in product quality. Price changes that are due to substitution effects are subject to hedonic quality adjustments.
In real estate economics, Hedonic regression is used to adjust for the issues associated with researching a good that is as heterogeneous, such as buildings. Because individual buildings are so different, it is difficult to estimate the demand for buildings generically. Instead, it is assumed that a house can be decomposed into characteristics such as its amount of bedrooms, the size of its lot, or its distance from the city center. A hedonic regression equation treats these attributes (or bundles of attributes) separately, and estimates prices (in the case of an additive model) or elasticity (in the case of a log model) for each of them. This information can be used to construct a price index that can be used to compare the price of housing in different cities or to do time series analysis. As with CPI calculations, Hedonic pricing can be used to correct for quality changes in constructing a housing price index. It can also be used to assess the value of a property, in the absence of specific market transaction data, and to analyze the demand for various housing characteristics, as well as housing demand in general. Due to the macro-oriented nature of hedonic models, with regard to their more general approach to assessment when compared to the more exacting and specific (albeit less contextualized) approach of individual assessment, when used for mass appraisal, the Uniform Standards of Professional Appraisal Practice, or USPAP, has established mass appraisal standards to govern the use of hedonic regressions and other automated valuation models when used for real estate appraisal.
Hedonic models outside of real estate valuation.
Aside from its use in housing market estimations, Hedonic regression has also seen use as a means for testing assumptions in spatial economics, and is commonly applied to operations in tax assessment, litigation, academic studies, and other mass appraisal projects.
Appraisal methodology more or less treats hedonic regression as a more statistically robust form of the sales comparison approach,[1] making it a popular means for assessment in any market or economic sector in which valuation between two categorically similar (or same) goods (such as two different kitchenware sets) can differ greatly based on additional factors (such as whether the pots and pans made of copper, cast iron, stone, etc, or what non-stick coating, if any, was applied) or constituent goods (including a steamer basket for one of the pots or having the largest pot be a Dutch oven) that strongly influence or semi-exclusively determine the unified good's value.
Criticisms of hedonic models
Some commentators, including Austrian economists, have criticized the US government's use of hedonic regression in computing its CPI, fearing it can be used to mask the "true" inflation rate and thus lower the interest it must pay on Treasury Inflation-Protected Securities (TIPS) and Social Security cost of living adjustments.[2]
The same use of hedonic models when analyzing consumer prices in other countries, however, has shown that non-hedonic methods may themselves misstate inflation over time by failing to take quality changes into account.[3]
^John A. Kilpatrick, Real Estate Issues in Class Certification 2007-10-10 at the Wayback Machine
^See, for example, Lippe, Peter von der (2001). "Some Conservative Comments on Hedonic Methods" (PDF). {{cite journal}}: Cite journal requires |journal= (help)
^See, for example, Reis, Hugo J.; Silva, J. M. C. Santos (2006). "Hedonic Price Indexes for New Passenger Cars in Portugal (1997–2003)" (PDF). Economic Modelling. 23 (6): 890–906. doi:10.1016/j.econmod.2006.04.003.
Further reading
Liegey, Paul. "Hedonic Quality Adjustment Methods". Bureau of Labor Statistics, US Department of Labor.
Rosen, S. (1974). "Hedonic prices and implicit markets: product differentiation in pure competition". Journal of Political Economy. 82 (1): 34–55. CiteSeerX10.1.1.517.5639. doi:10.1086/260169. JSTOR 1830899. S2CID 39481486.
Nelson, J. (1978). "Residential choice, hedonic prices, and the demand for urban air quality". Journal of Urban Economics. 5 (3): 357–369. doi:10.1016/0094-1190(78)90016-5.
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Hedonic adjustment redirects here Not to be confused with Hedonic adaptation This article needs additional citations for verification Please help improve this article by adding citations to reliable sources Unsourced material may be challenged and removed Find sources Hedonic regression news newspapers books scholar JSTOR November 2022 Learn how and when to remove this template message In economics hedonic regression also sometimes called hedonic demand theory is a revealed preference method for estimating demand or value It decomposes the item being researched into its constituent characteristics and obtains estimates of the contributory value for each This requires that the composite good the item being researched and valued can be reduced to its constituent parts and that those resulting parts are in some way valued by the market Hedonic models are most commonly estimated using regression analysis although some more generalized models such as sales adjustment grids are special cases which do not An attribute vector which may be a dummy or panel variable is assigned to each characteristic or group of characteristics Hedonic models can accommodate non linearity variable interaction and other complex valuation situations Hedonic models are commonly used in real estate appraisal real estate economics and Consumer Price Index CPI calculations In CPI calculations hedonic regression is used to control the effect of changes in product quality Price changes that are due to substitution effects are subject to hedonic quality adjustments Contents 1 Hedonic models and real estate valuation 2 Hedonic models outside of real estate valuation 3 Criticisms of hedonic models 4 See also 5 References 6 Further readingHedonic models and real estate valuation EditIn real estate economics Hedonic regression is used to adjust for the issues associated with researching a good that is as heterogeneous such as buildings Because individual buildings are so different it is difficult to estimate the demand for buildings generically Instead it is assumed that a house can be decomposed into characteristics such as its amount of bedrooms the size of its lot or its distance from the city center A hedonic regression equation treats these attributes or bundles of attributes separately and estimates prices in the case of an additive model or elasticity in the case of a log model for each of them This information can be used to construct a price index that can be used to compare the price of housing in different cities or to do time series analysis As with CPI calculations Hedonic pricing can be used to correct for quality changes in constructing a housing price index It can also be used to assess the value of a property in the absence of specific market transaction data and to analyze the demand for various housing characteristics as well as housing demand in general Due to the macro oriented nature of hedonic models with regard to their more general approach to assessment when compared to the more exacting and specific albeit less contextualized approach of individual assessment when used for mass appraisal the Uniform Standards of Professional Appraisal Practice or USPAP has established mass appraisal standards to govern the use of hedonic regressions and other automated valuation models when used for real estate appraisal Hedonic models outside of real estate valuation EditAside from its use in housing market estimations Hedonic regression has also seen use as a means for testing assumptions in spatial economics and is commonly applied to operations in tax assessment litigation academic studies and other mass appraisal projects Appraisal methodology more or less treats hedonic regression as a more statistically robust form of the sales comparison approach 1 making it a popular means for assessment in any market or economic sector in which valuation between two categorically similar or same goods such as two different kitchenware sets can differ greatly based on additional factors such as whether the pots and pans made of copper cast iron stone etc or what non stick coating if any was applied or constituent goods including a steamer basket for one of the pots or having the largest pot be a Dutch oven that strongly influence or semi exclusively determine the unified good s value Criticisms of hedonic models EditSome commentators including Austrian economists have criticized the US government s use of hedonic regression in computing its CPI fearing it can be used to mask the true inflation rate and thus lower the interest it must pay on Treasury Inflation Protected Securities TIPS and Social Security cost of living adjustments 2 The same use of hedonic models when analyzing consumer prices in other countries however has shown that non hedonic methods may themselves misstate inflation over time by failing to take quality changes into account 3 See also EditHedonic index Compensating differential Kelvin Lancaster Dynamic pricingReferences Edit John A Kilpatrick Real Estate Issues in Class Certification Archived 2007 10 10 at the Wayback Machine See for example Lippe Peter von der 2001 Some Conservative Comments on Hedonic Methods PDF a href Template Cite journal html title Template Cite journal cite journal a Cite journal requires journal help See for example Reis Hugo J Silva J M C Santos 2006 Hedonic Price Indexes for New Passenger Cars in Portugal 1997 2003 PDF Economic Modelling 23 6 890 906 doi 10 1016 j econmod 2006 04 003 Further reading EditLiegey Paul Hedonic Quality Adjustment Methods Bureau of Labor Statistics US Department of Labor Rosen S 1974 Hedonic prices and implicit markets product differentiation in pure competition Journal of Political Economy 82 1 34 55 CiteSeerX 10 1 1 517 5639 doi 10 1086 260169 JSTOR 1830899 S2CID 39481486 Nelson J 1978 Residential choice hedonic prices and the demand for urban air quality Journal of Urban Economics 5 3 357 369 doi 10 1016 0094 1190 78 90016 5 Curated bibliography at IDEAS RePEc Retrieved from https en wikipedia org w index php title Hedonic regression amp oldid 1136320838, wikipedia, wiki, book, books, library,
