My presentation at Fifth Annual Meeting of the Society for Environmental Law and Economics (22-23 May 2013, University of Bar Ilan, Israel). Original paper available at http://papers.ssrn.com/abstract=1972949 <abstract> The hedonic method is an econometric tool to calculate implicit evaluation of environmental factors by employing the fact that preference of residents is capitalized into housing price. This paper utilizes the change of land price after the radiation contamination caused by the accident at the Fukushima Dai-ichi Nuclear Power Plant to calculate the amount of damages under Japanese tort law. The paper argues that the hedonic estimates can be used not only as proprietary loss of land owners but also as nonproprietary loss of residents in the radiation contaminated area. The hedonic method can be employed in other environmental nuisance cases, such as noise nuisance lawsuits and air pollution lawsuits.

1. A hedonic approach to
radiation contamination damages
Hatsuru Morita (Tohoku University, School of Law)

2. Table of contents


Motivation
Econometric problems




Legal problems



2
Two biases
Identification strategy
Data
Proprietary loss
Non-proprietary loss
Concluding remarks
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3. Motivation
3
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4. 4
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5. 5
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6. Motivation

TEPCO (and the Japanese government) has offered a
menu of compensation for radiation contamination
damages

It does not cover property damages nor mental damages
outside of the governmental evacuation area


Many residents outside of the evacuation area are filing
lawsuits against TEPCO


6
Within the evacuation area, TEPCO basically compensates the full
amount of property damages
They are suffering a lot of inconvenience (and potential disease risk)
During the 5 months after the earthquake and the accident, about
150 thousand elementary school children and junior high school
children have moved out from Fukushima prefecture
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7. Econometric problems
7
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8. Hedonic method


Explicit market for environmental factors usually does
not exist; however,
Rosen 1974

Quality depends a set of characteristics: Q = (q1, q2, …, qn)

Price of ith house: Pi = P(q1, q2, …, qn)



8
 ∂P/∂qj gives the marginal implicit price for qj
In competitive market, the marginal price is equal to an
individual consumer’s ‘marginal willingness to pay’ (MWTP)
We can employ the hedonic estimates as proxies of
mental damages as well as property damages
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9. Econometric problems

Two sources of bias

Unobserved omitted variables

Housing price is correlated with not only environmental factors, but
also other factors


Self-selection


Heterogeneity among individuals (both sellers and buyers)
Individuals with higher valuations for environmental factor sort out to
areas with better environmental quality

9
E.g., air is heavily polluted in urban areas, where housing price also tends
to be high.
In this case, the structure of preference and the amount of sorting
behavior can affect the estimates.
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10. Identification strategy

For radiation contamination:

The omitted variable bias is not a serious problem

The degree of radiation contamination is exogenous to relevant variables
 excellent natural experiment



The degree of contamination depends on geography, direction of wind, and
weather at the time of radiation emission, all of which are not correlated with
housing price and control variables
Then simple analysis can reveal the MWTP
For self-selection:

We need some measures to account for heterogeneity



10
Sorting behavior does exist in Fukushima case (kids (and their parents)
are moving out)
Change of population and age structure can mitigate the problem
However, whether we need to control this factor is another problem
(discussed later)
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11. Constructing counterfactuals

How can we construct counterfactuals?


What the land price of the contaminated area would be if it
had not been contaminated?
Solutions



Difference-in-differences
Synthetic control
Structural estimation

11
May be a good tool for policy evaluation, but difficult to employ
before the court
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12. 12
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13. Matching

Which cities to pick up as control?

Cities in northeastern Japan are good candidates


One problem:




13
Unobservables, such as level of urbanization/ industrialization,
demographic structures are basically similar
The coastal area of Fukushima is heavily damaged by the tsunami and
many people have been moving into the inland area, which is also
contaminated
In addition, those who had lived in the evacuation area have been
moving into the inland area
Then the demand function for land in the inland area may have
changed considerably
(solution is discussed later)
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14. Tsunami area
Radiation contamination
area
14
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15. Data source
[Under construction…]

Outcome variable

Land price
Japanese

Two series of data (as of 1/1 and as of 7/1)
Each

city has 20-60 reference points
Treatment variable


government publishes land price every one year
Level of radiation contamination
Other covariates

Population, household income, age distribution, tax revenue,
and so on
(Age
structure is especially important, since younger children are
more vulnerable to radiation contamination)
15
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16. Variables

Do not include coastal area, but only inland area


The coastal area is hit by tsumani, which makes it difficult to
separately estimate radiation contamination effect from
tsunami effect
Evacuation area is also to be excluded, since we want to
estimate the effect of radiation contamination only

16
Evacuation order by the government must have put the housing price
downward strongly
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17. Variables

Population change is an important variable, too



Whether it is appropriate to control population or not
depends on whether the change of population is within a
proximate cause of the tort behavior by TEPCO

17
Managi 2013 shows that both the level of radiation contamination and
the decrease of population have significant effect on land price
However, decrease of population is not only caused by industry
structure, but also by the radiation contamination itself
Not an econometric issue, but a legal issue
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18. A tentative result

A simple DD estimate: -4.11%


Land price of Jul 1 (every one year)
Fukushima city (capital of Fukushima) vs Morioka city (capital of
Iwate)


Averaging 22 points from Fukushima and 46 points from Morioka
2009/2010/2011

(Assuming that each city has its own trend)
Change of land price
20102011
Fukushima city
-3.41%
-7.02%
Morioka city
18
20092010
-7.08%
-6.58%
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19. 19
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20. Further concerns

Stickiness of land market in Fukushima

Fukushima is rather rural area (compared to, say, Tokyo) and
the liquidity of the land market is not so high



How could we account for such illiquidity?


20
In case of stock price, changes of fundamental firm value are rapidly
incorporated into the stock price
In contrast, the low liquidity of land market in Fukushima would
cause considerable delay of incorporation of relevant information
Just observing long period after the earthquake (say, two or three
years) is OK?
At the same time, estimation of longer windows leads to larger noise
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21. Further concerns (cont’d)

Huge public funding has been provided to the disaster
site and radiation contamination site (i.e., Fukushima)


The inflow of public funding increases the land price
We can observe the effect in Fukushima and Miyagi



Is it necessary to account for the effect of public funding?


21
Fukushima has both disaster relief and contamination relief
Miyagi has only disaster relief, but Miyagi is the center of the
northeastern Japan and reconstruction activity center is located in
Miyagi, which attracts lot of business
We could argue that the effect of radiation contamination is mitigated
by the public funding and that we need not consider the effect of
public funding
(similar argument with the case of insurance payment)
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22. Legal problems
22
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23. Legal problems


Let’s suppose we have found decline of real estate price:
Then, there are two ways to take such decline into
account:



Proprietary loss
Non-proprietary loss
Dual nature of hedonic valuation

Non-proprietary loss is capitalized into proprietary loss and
the latter is a good proxy for the former


23
Double compensation needs to be avoided
E.g., those who have received proprietary compensation are not
qualified for non-proprietary compensation
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24. Proprietary loss


Is it possible to evaluate the ‘potential’ decrease of land
price as proprietary loss?
Positive arguments


Even if it is still ‘potential’, it is real loss
Negative arguments


When a victim is paid for her non-proprietary loss, she gets
double compensation
However, it is possible to adjust the two compensation
scheme

24
But it may invoke additional transaction cost
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25. Non-proprietary loss


If it is difficult to compensate the decline of real estate
price as proprietary loss, then non-proprietary loss can
be a viable alternative
In addition, those who do not own real estate and are
just tenants do not suffer from the decline of housing
price


25
Rent is not so elastic (especially for downward)
Coastal area residents and evacuated people have come into
inland area, which causes temporary increase of rent
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26. Non-proprietary loss


Since how residents value radiation contamination is
capitalized into real estate price, it is a good proxy for
non-proprietary loss
A tentative proposal:


Hypothesize typical size of a family house, which must be
bigger in Fukushima than in Tokyo, and calculate decrease of
hypothetical decline of real estate price
Compare with TEPCO’s guideline for those from the evacuated
area:


26
100,000 or 50,000/month for those who have evacuated
100,000 for those who have taken indoor-shelter
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27. Non-proprietary loss

Need to account for heterogeneity?


Families with younger children must suffer lot more than
families with no children
A possible alternative




27
Compute the ratio of families with younger children;
Families without younger children are not qualified to nonproprietary loss;
Families with younger children are qualified to non-proprietary loss
multiplied by the inverse of the above ratio;
Cut-off age can be elementary school or junior high school
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28. Non-proprietary loss

Underestimation?

Illiquidity of Fukushima real estate market


It may take longer time for the change of utility to be capitalized into
housing price
Difference of level of land price between urban area and rural
area


E.g., huge difference between price level of Tokyo and Fukushima
However, the same problem arises in case of life and casualty loss,
where damages are determined by income level

28
The difference is caused by capitalization of human capital and other
factors
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29. Non-proprietary loss

In effect, ‘hedonic’ loss implies compensation for future
loss


Since future disutility is also capitalized into housing price, like
stock price
Double compensation must be avoided


29
Selling a house after receiving ‘hedonic’ loss does not cause double
compensation since the housing price is lower than before the
accident
Those who come after the accident can purchase houses with lower
price but are not qualified for ‘hedonic’ loss, since they ‘come to the
nuisance’
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30. Non-proprietary loss

Mitigation principle?



If migration cost is cheaper than estimated decrease of real
estate price, then is it irrational to stay in Fukushima?
No!
The decision to stay in Fukushima is rational since there is
huge benefit from local ties and blood ties and moving out
from Fukushima would destroy such ties

30
Although there could be fake non-migrator, it is difficult to distinguish
them and we need to accept them
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31. Concluding remarks
31
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32. Concluding remarks


In order to achieve socially optimal deterrence, it is
basically necessary to compensate for the whole
externality
Traditional loss calculation method is not effective to
achieve this goal and more comprehensive approach is
desirable

32
Econometric method of hedonic approach can be a useful tool
as a proxy
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33. Concluding remarks

CBA of decontamination


Although the cost of contamination is not included in the
intermediate guideline, it will probably included in the final
guideline
However, we need a cost-benefit analysis, for example, of
decontamination activity

If the cost is larger than the benefit, then the decontamination
process is not justified



33
Mitigation principle may require decreasing the amount of damages
If cost is smaller than benefit, then the decontamination is beneficial
A caveat: possibility of underestimation
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