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On the functional form of the hedonic price function: a matching-theoretic model and empirical evidence

Lisi, Gaetano (2012): On the functional form of the hedonic price function: a matching-theoretic model and empirical evidence. Forthcoming in: International Real Estate Review No. Forthcoming

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Abstract

The key issue in the hedonic price theory is that although the literature emphasises the intrinsic nonlinearity in the relationship between house prices and housing characteristics, very little theoretical guidance is provided regarding the more appropriate mathematical specification for the hedonic price function. Thus, most empirical studies make use of flexible functional forms or simple linear models which possess a direct economic meaningfulness. This theoretical paper attempts to fill this gap by using the Mortensen-Pissarides matching model to show the nonlinearity of the hedonic price function and provide insights on the more appropriate functional relationship between prices and attributes.

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