A Note On the Estimation of Capitalization

Abstract

Several authors have applied the hedonic model using before-after data to estimate the willingness to pay for a change in public expenditure or amenity This article shows that attempts to interpret the results of such estimation as a measure of willingness to pay for a local amenity or public expenditure in this case are flawed. The implicit basis for such estimation is a single-jurisdiction partial equilibrium model, whereas the underlying Tiebout model is multijurisdictional and general equilibrium. It is argued that the results of such estimations incorporate biases, the direction and magnitude of which cannot be predicted. If service-tax packages are exogenous, then the hedonic model using before-after data will likely provide incorrect estimates of the willingness to pay.