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Browse: Home / How “Fixed” are Fixed Effects? A Novel Approach to Measuring the Value of Location

How “Fixed” are Fixed Effects? A Novel Approach to Measuring the Value of Location

By Stan Longhofer on 01/10/2023

Stanley D. Longhofer and Christian L. Redfearn

Current draft: December 2022

In this paper, we develop a novel method for measuring the value of location within a metropolitan area. By estimating overlapping “semi-local” regressions and exploiting the symmetry among them, we are able to construct a surface of the relative value of location within a metropolitan area. This methodology maintains the simplicity of using location fixed effects while resolving the omitted variable bias that arises from the traditional application in hedonic regressions. Using data from Maricopa County (Phoenix), we find that the premium for location is decidedly non-monocentric, asymmetric, and highly dynamic. This dynamism conflicts with the typical assumptions associated with the use of fixed effects in the construction of aggregate price indexes, and potentially complicates the interpretation of difference-in-difference methods.

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Posted in Academic Research, Research & Data | Tagged Longhofer

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