Hedonic pricing with redevelopment options: A new approach to estimating depreciation effects
NOTICE: this is the author’s version of a work that was accepted for publication in Journal of Urban Economics. Changes resulting from the publishing process, such as peer review, editing, corrections, structural formatting, and other quality control mechanisms may not be reflected in this document. Changes may have been made to this work since it was submitted for publication. A definitive version was subsequently published in Journal of Urban Economics [67, 3, 2010] DOI: 10.1016/j.jue.2009.11.003
The standard hedonic model of durable assets is a special case of a more general model that contains two additive terms: (1) use value of the existing hedonic vector and (2) the value of the option to reconfigure hedonic characteristics. One empirical implication is that the two parts of value are related: e.g., use value increases with interior area whereas option value decreases with “intensity,” the ratio of structure value divided by land value. Increases in building age reduce use value but increase option value. Data from Greenwich Connecticut indicate that intensity has the expected negative effect. Coefficients on building age are shown to be better measures of depreciation when intensity variables are included in the regression.
John M. Clapp and Katsiaryna Salavei. "Hedonic pricing with redevelopment options: A new approach to estimating depreciation effects" Journal of Urban Economics 67.3 (2010).
Available at: http://works.bepress.com/katsiaryna_salaveibardos/1