PPT Slide
We will use a “hedonic pricing model” to explain the existence and magnitude of compensating wage differentials. Under a hedonic pricing model, a commodity is sold that possesses a set of characteristics that vary across the differentiated products that are offered in the market. The bundle of characteristics that describe a particular commodity is observed as is the price of the commodity. The market price of individual characteristics, however, is not directly observed, but may be imputed using econometric techniques.