Choice of functional form for hedonic price equations

Abstract

The appropriate functional form for a hedonic price equation cannot in general be specified on theoretical grounds. In this paper, a statistical procedure for the choice of functional form is proposed. A highly general functional form is specified that yields all other functional forms of interest as special cases. Likelihood ratio tests are used to test the appropriateness of alternative forms. The procedure is illustrated using cross section microdata for housing. For the case considered, the functional forms most commonly used in previous studies are strongly rejected.