Environmental amenities and subjective well-being : testing the validity of hedonic pricing

This paper proposes a subjective well-being approach to test the equilibrium condition implicit in hedonic pricing. Contrary to the conclusions of previous studies, we show that both approaches are not complementary but, rather, they are alternative ways of computing implicit prices of environmental amenities. They are equivalent when the equilibrium condition holds but, in the absence of such equilibrium, only the subjective well-being approach is theoretically correct. In an empirical application, we find that (i) the total impact of location-specific amenities on self-reported well-being is not fully captured through compensating differentials in labor and housing markets, indicating that implicit prices derived using the hedonic approach would be incorrect and thus suggesting caution in its application, and (ii) environmental factors are as important as the most critical socio-economic and socio-demographic factors in explaining subjective well-being.