An Empirical Investigation into the Performance of Ellickson's Random Bidding Model, with an Application to Air Quality Valuation

Divergence in alternative Hicksian welfare measures: the case of revealed preference for public amenities

“…He finds that the WTP estimates in Rosen's (1974) hedonic approach with a Translog utility specification are quite similar to those obtained using the Ellickson's random bidding approach. The significance of the result of Chattopadhyay (1998) is that surplus measures do not differ much whether or not a preference structure, such as the Translog, is imposed on the model. It is interesting to note from Tables V and VI that the percentage divergences are almost negligible in the case of the two air pollution variables, signifying that either measure can be accepted as a measure of welfare.…”

“…In brief, the estimates are quite comparable across different specifications of the hedonic price function but show considerable differences across second-stage specifications of the two utility functions. Chattopadhyay (1998) compares the standard hedonic model with Ellickson's (1981) random bidding model, which does not involve explicit specification of the form of the utility function. He finds that the WTP estimates in Rosen's (1974) hedonic approach with a Translog utility specification are quite similar to those obtained using the Ellickson's random bidding approach.…”

Household diversity and market segmentation within a single neighborhood

“…But, these divisions will be defined over many continuous variables such as age and income but also on continuously weighted combinations of personal characteristics such as strong likes and dislikes about the community, social characteristics and habits, even memberships in civic, professional, or religious organizations. What distinguishes one type from another may not be a discrete cut-off over one or two demographic dimensions represented by categorical quintiles (Ellickson 1981;Chattopadhyay 1998), but may be defined by intersections that divide groups over an n-dimensional surface from the n critical characteristics that segment households into types.…”

“…Many analysts now depart from the traditional hedonic pricing method where an analyst estimates the impacts of local amenities or structural characteristics on dwelling prices from an hedonic equation using a regression model. Some employ discrete choice methods (Bayer et al 2002;Quigley 1985;Chattopadhyay 2000), others use locational equilibria (Sieg et al 2002), and still others explore random bidding models (Ellickson 1981;Lerman and Kern 1983;Chattopadhyay 1998) as alternative devices to capture diversity considered inaccessible from a single hedonic equation. Yet even these alternative works appeal to some degree to a relatively strong form of Tiebout's (1956) "voting with your feet" model whereby similar households coordinate to supply an optimal bundle of local amenities befitting their type.…”

“…One limitation of the Ellickson model, though, is that it defines household types exogenously, using arbitrary partitions of continuous demographic variables to define groups by discrete income or age categories. Subsequent applications distinguish households by income and family size (Lerman and Kern 1983), by resource access and life-cycle differences (Chattopadhyay 1998), by school districts or by common package of local amenities (Sieg et al 2002), or by assuming that everyone differs by only a single taste parameter so that all households in a market equilibrium order the most preferred to least preferred neighborhood in exactly the same way (Smith et al 2004). Critically, in each case these a priori methods for market segmentation are adopted without actually testing the assumption.…”