Measuring welfare effects in models with random coefficients

In economic research, it is often important to express the marginal value of a variable in monetary terms. This marginal monetary value is the ratio of two partial derivatives of the conditional indirect utility function, which reduces to the ratio of two coefficients if the utility function is linear. Based on the overwhelming evidence of taste differences among people, random coefficient models have become increasingly more popular in recent years. In random coefficient models, the marginal monetary value is the ratio of two random coefficients and is thus random itself. In this paper, we study the distribution of this ratio and particularly the consequences of different distributional assumptions about the coefficients. It is shown both analytically and empirically that important characteristics of the distribution of the marginal monetary value may be sensitive to the distributional assumptions about the random coefficients. The median, however, is much less sensitive than the mean. The authors would like to thank Ton Steerneman for stimulating discussions and helpful comments.

A Taste for Trips out of Town: Urban Sprawl and Access to Open Space

Residential development at the urban fringe raises the cost of trips to open space. We derive a simple expression for the tax that internalizes this effect of sprawl in a monocentric city andapply it using survey data on recreational activity. Urban sprawl is inefficient if landowners ignore the social value of open space in their decision to develop it. The absence of a market for open space amenities impedes reliable estimation of their value, so policies that control urban growth may be ill-informed (Brueckner, 2000). Our approach to this valuation problem relies on the well-established notion that travel costs of recreational activity serve as an implicit price (Hotelling, 1947; Phaneuf and Smith, 2006). We extend the conventional monocentric city model with a demand for ‘trips out of town’: recreation in large contiguous undeveloped areas like forests, wetlands or the countryside, for which open space within the urban boundary is an imperfect substitute. Urban expansion reduces accessibility of such ‘true open space’ for prior inhabitants. We derive a simple expression for the tax on conversion of agricultural land to urban use that internalizes this effect and apply it to the city of Amsterdam. The travel cost approach has rarely been applied to the valuation of open space in or near urban areas (McConnell and Walls, 2005). In particular, most applied welfare analyses of open space provision in a general equilibrium framework have been based on capitalization of benefits into local property values. This entails a focus on comparably localized effects.1 Notably, open space amenities in Cheshire and Sheppard (2002) are confined to a surrounding squared kilometre. Walsh (2007) also considers the benefit of proximity to public open space, yet the average distance is only about one kilometre in his empirical application. In large cities, visits to true open space will generally require a much longer trip.

Housing supply in the Netherlands

In spite of a growing recognition of the importance of supply conditions for the level and volatility of house prices, empirical work on housing supply outside the US is scarce. This paper considers various measures of housing supply in the Netherlands, where real house prices have roughly tripled since 1970. Besides the volume of investment in residential structures and new housing construction in units, we derive time series of structure and location quality in a hedonic analysis. Each of these variables appears to be almost fully inelastic with respect to house prices in at least the short to medium long run. Further analysis of the quality of location index shows that conventional models of competitive land and housing markets cannot account for these findings. However, they may be well explained in terms of the rather extensive body of interventions by the Dutch government.

The costs and benefits of providing open space in cities

We use the monocentric model of a city to derive a simple cost-benefit rule for the optimal provision of open space. Although many researchers have investigated the value of open space in cities, few of them have compared it to the costs of providing this amenity. The rule derived here is essentially the Samuelson-condition for the optimal provision of a public good, with the price of land as the appropriate indicator for its cost. The condition is made operational by computing the willingness to pay for public and private space on the basis of empirical hedonic price functions for three Dutch cities. The conclusions with respect to the optimal provision of open space differ between the three cities. Further investigation reveals that willingness to pay for parks and public gardens increases with income, although not as fast as that for private residential space.