Revealed preference for relative status: Evidence from the housing market

http://dx.doi.org/10.1016/j.jhe.2012.01.001 

Abstract: This paper investigates the value individuals place on their relative housing consumption as compared to absolute housing consumption. Using observed housing sales from three Ohio MSAs in 2000, a spatial Durbin hedonic price model provides total marginal willingness-to-pay estimates for both characteristics of housing units and those of its neighbors. Using this revealed-preference approach, we find evidence suggesting individuals do value relative house size, but the absolute effect dominates. For instance, the estimates indicate that if all homes in Columbus were to increase in size by 100 square feet, the net effect of impacts on absolute and relative consumption would be to increase house prices by $605 on average. This stands in contrast to the stated preference literature, which frequently find individuals to be willing to forgo absolute well-being in exchange for relative status gains.

Highlights

► Surveys suggest the size of house relative to neighbors matters most to people.
► Test relative versus absolute size with Bayesian spatial Durbin hedonic model.
► Data set includes 20,000 fair market housing transactions from Ohio in 2000.
► Relative house size matters in findings, but preference for absolute size dominates.
► Implies that an area-wide increase in housing size would increase social welfare.

by Susane J. Leguizamon^a, , Justin M. Ross^{b, ,}  

^a Department of Economics, Tulane University, New Orleans, LA 70125, United States 

^b School of Public & Environmental Affairs, Indiana University, Bloomington, IN 47405, United States

Journal of Housing Economics via Elsevier Science Direct www.ScienceDirect.com

Volume 21, Issue 1, March 2012, Pages 55–65

Keywords: Happiness; Social welfare; Revealed preferences; Fiscal zoning