Efficient Estimation of Structural Hedonic Systems

In any hedonic system in which consumers purchase a characteristic embodied in a good, consumers with strong tastes for the characteristic are matched with producers with low costs of producing it. This paper demonstrates that, as a result of this matching process, the "exogenous" variables in the supply e quation cannot be used as instruments in the demand equation and vice versa. The authors show that despite the absence of the usual instru ments, the system is identified under reasonable orthogonality assump tions. They develop an efficient estimator for the identified system and suggest some specification tests. Copyright 1988 by Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.