Hedonic regression, or more generally hedonic demand theory, in economics is a method of estimating demand or prices. It decomposes the item being researched into its constituent characteristics, and obtains estimates of the value of each characteristic. In essence it assumes that there is a separate market for each characteristic. It may be estimated using ordinary least squares (OLS) regression analysis. Often an attribute vector (or dummy variable) is assigned to each characteristic or group of characteristics. Each characteristic within a vector is either included in the regression or not, by multiplying it by either 1 or 0.

It is commonly used in real estate economics and consumer price index calculations. In consumer price index 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, it is used to adjust for the problems associated with researching a good that is as heterogeneous as buildings. Because buildings are so different, it is difficult to estimate the demand for buildings genericly. Instead, it is assumed that a house can be decomposed into characteristics such number of bedrooms, size of yard, distance to the city centre, etc. An 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 Consumer price index (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. It can also be used to analyse the demand for various housing characteristics, and housing demand in general. It has also been used to test assumptions in spatial economics.

See also

• Kelvin Lancaster

References

• US government paper that uses the Hedonic Model to value consumer durables in the CPI
• Rosen, S {1974) "Hedonic prices and implicit markets", Journal of Political Economy, Vol 82, 1974, pp.34-55.
• Nelson, J. (1978) "Residential choice, hedonic prices, and the demand for urban air quality", Journal of Urban Economics, Vol 5, 1978, pp. 357-369.