Hedonic Prices, Goods-Specific Effects and Functional Form: Inferences from Cross-Section Time Series Data

Tests for two key elements of the hedonic model of price determination for differentiated goods are proposed when cross-sectional, time series data are available. First, the hedonic hypothesis, that price is determined by sellers' and buyers' valuations of characteristics bundled in a good, is tested against the alternative that consumers demand specific goods. The sensitivity of the outcome of the test to unmeasured characteristics, serial correlation or heteroscedasticity, and misspecification of functional form is assessed. Second, a novel approach to testing functional form illustrates limitations of testing hedonic specifications only against alternatives nested in the Box-Cox functional form.