A New Approach to Estimating the Production Function for Housing
Published in American Economic Review, 2010
This paper develops a new approach to estimating the production function for housing. We extend the traditional Rosen-Roback model by allowing for endogenous production of housing. We develop a new estimator that combines the standard hedonic approach with an instrumental variables strategy to control for the endogeneity of land prices. The main advantage of our approach is that we do not need to observe the price of land to identify the parameters of the production function. We apply our estimator to a large sample of single-family homes in the Pittsburgh metropolitan area. Our main empirical finding is that the elasticity of substitution between land and capital is close to one, implying that a Cobb-Douglas specification provides a good approximation of the production technology for housing.
Recommended citation: Epple, D., Gordon, B. R., & Sieg, H. (2010). "A New Approach to Estimating the Production Function for Housing." American Economic Review. 100(3), 905-924.
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