Hedonism vs. nihilism: No arbitrage and tests of urban economic models

Marcus Berliant, Daniel P. McMillen

Research output: Contribution to journalArticlepeer-review

Abstract

We present two notions of "no arbitrage" in urban economic models and show that there is no model satisfying both. The standard hedonic housing model of urban economics and its generalizations are consistent with the first of these, but inconsistent with the second. We present a model consistent with the second notion of "no arbitrage" and a continuum of models consistent with neither notion that are observationally equivalent to the standard model, even if the utility function of consumers is known. Only one of these is the standard model. Thus, the available tests of the standard model cannot provide much evidence of its validity. Finally, we examine nonlinear price systems consistent with the second notion of "no arbitrage" and their welfare consequences.

Original languageEnglish (US)
Pages (from-to)118-131
Number of pages14
JournalRegional Science and Urban Economics
Volume36
Issue number1
DOIs
StatePublished - Jan 2006

Keywords

  • Hedonic models
  • Monocentric City
  • No arbitrage

ASJC Scopus subject areas

  • Economics and Econometrics
  • Urban Studies

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