When Does Static Willingness to Pay Mislead? A Framework for Dynamic Hedonic Valuation

TL;DR

This paper introduces a nonparametric framework for dynamic hedonic valuation to better understand how consumer preferences evolve over time, especially with habit-forming attributes, improving policy analysis accuracy.

Contribution

It develops a novel revealed-preference approach for dynamic valuation, addressing limitations of static models in capturing habit formation effects.

Findings

Static hedonic models restrict price interpretation.

Habit formation enhances behavioral coherence.

The framework diagnoses when static valuation is appropriate.

Abstract

Many policy counterfactuals depend on how consumers value product attributes such as sugar, sodium, caffeine, alcohol, or emissions. Standard hedonic and differentiated-products models interpret these valuations statically. That interpretation is restrictive when attributes are habit forming: observed prices then reflect both contemporaneous marginal value and the continuation value generated by current consumption. I develop a nonparametric revealed-preference framework for dynamic hedonic valuation, deriving necessary and sufficient conditions for rationalising observed prices and choices. Using household scanner data on cereal purchases, I show that the hedonic representation places real restrictions on prices, while habit formation improves behavioural coherence conditional on that representation. The results provide a diagnostic for when static attribute valuation is justified and when prices reveal more than contemporaneous marginal values.