Simon J. Hviid, Danmarks Nationalbank – University of Copenhagen

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Simon J. Hviid, Danmarks Nationalbank

"Valuation of Non-Traded Amenities in a Dynamic Demand Model"

Abstract

Using unique population-wide Danish register data with precise measures of households’ wealth, income, and socio-economic status, we specify and estimate a dynamic structural model of residential neighbourhood demand. Our model includes moving costs, forward looking behaviour of households, and uncertainty about the evolution of neighbourhood attributes, wealth, income, house prices, and family composition. We estimate marginal willingness to pay for non-traded neighbourhood amenities with a focus on air pollution.

We allow household willingness to pay to vary in household characteristics and argue that low wealth and low income households are borrowing constrained. Our application finds that the dynamic approach adjusts for various biases relative to a static approach and that the willingness to pay of households who are likely borrowing constrained are much more sensitive to changes in wealth.

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