Property Tax Web Series

Abstract

The difference-in-differences (DID) approach that identifies the capitalization of amenities through changes in housing prices has been widely used in the literature of hedonic estimation for over fifty years. However, more recently, concerns have been raised about how to interpret the estimated capitalization effects from DID as changes in welfare (Kuminoff, Parmeter, and Pope, 2010; Klaiber and Smith, 2013). We demonstrate two reasons for how this divergence between capitalization and welfare changes might arise: 1) a change in preferences of the marginal individual, often referred to as “Tiebout bias” (Goldstein and Pauly, 1981; Rubinfield, Shapiro, and Roberts, 1987) and 2) when the jurisdiction changing policy has a large share of the relevant market’s population or “market power.” (Hoyt, 1991; Agrawal, Hoyt, and Wilson, 2022) Then, following an approach developed by Banzhaf (2021), we estimate the capitalization of school redistricting in a DID framework that incorporates general equilibrium effects. When comparing estimates from our generalized DID model to the conventional DID model, we find significant differences in both the capitalization effects and welfare changes associated with the school redistricting.

This paper was presented by William Hoyt (University of Kentucky) on September 13, 2024 as part of the 2024-2025 Syracuse-Chicago Webinar Series on Property Tax Administration and Design. Erin Troland (Federal Reserve Board) was the discussant for this presentation.