1. Towards an Urban Quality of Life Index Basic theory & econometric methods
Bernard M.S. van Praag
University of Amsterdam
and
Ada Ferrer -i-Carbonell
ICREA & Institut d'Anàlisi Econòmica (CSIC), Barcelona

2. Basic questions How is Urban Quality of Life (UqoL) measured?
Which factors determine UQoL?
Is it possible to translate UQoL –variables in terms of money?
Can one construct an Urban UQoL–index ?
Can it be used as a benchmark for urban policy?
Can it be used to make quality comparisons between cities?

3. Two approaches Hedonic equations
Trade offs made in the market
Limitations: (1) people do not optimize, (2) there are market failures & (3) decisions depend on external factors.
(Roback (1982), Rosen (1979), Blomquist et al. (1988), Gyourko, J. (1991)
Happiness economics offers an alternative

4. Hedonic equations (1)
Rent determinants in Lima (in green urban variables)
Source: Quality of Life in Urban Neighbourhoods in Metropolitan Lima, Peru, L. Alcázar & R. Andrade (2008).

5. Hedonic equations (2)
Rent (r) depends on house characteristics (h) and urban factors (u)
Rent is decomposed into hedonic factors
Ratio α1/α2 is the market ratio between two urban factors.
Is it the subjective trade–off ratio of the owner?
True only if house owner lives in a house of optimal choice, given income and other individual variables.
Strong assumption, especially for long term purchases
If there is no optimum, then is a rent index but not a subjective Urban Quality of Life – index.

6. Happiness economics Key tool: Satisfaction questions
Clark and Oswald (1994), Easterlin (1974), Van Praag (1971), Frey and Stutzer (2002), Van Praag & Ferrer-i-Carbonell (2004,2007), Graham (2007), DiTella, MacCulloch & Oswald (2001), Oswald & Powdthavee (2007), Blanchflower & Oswald (2004), DiTella, Haisken–DeNew, MacCullogh (2007), Helliwell (2007).

7. Life Satisfaction Question
In conclusion, we would like to ask you about your satisfaction with your life in general.
Please, answer according to the following scale: 0 means ´completely dissatisfied´, 10 ´completely satisfied´.
How satisfied are you with your life, all things considered?
0___1___2___3___4___5___6___7___8___9___10
completely completely
dissatisfied satisfied

8. Peruvian questionnaire (2008).
En una escala del 1 al 10, donde 1 es totalmente insatisfecho y 10 es totalmente satisfecho,
¿cuán satisfecho se encuentra usted con los siguientes aspectos de su distrito...(LEER ATRIBUTOS)? (MOSTRAR TARJETA 62 Y ANOTAR PUNTAJE)
Puntaje
El nivel del tráfico y congestión vehicular
El servicio del transporte públic
El grado de la contaminación
La tranquilidad / silencio en su vecindad

9. Main characteristics
Assumption: Respondents who give the same answer are equally satisfied.
(ordinal interpersonal comparability)
What are factors defining life satisfaction?
Age, gender, income, health, family size, social relations, urban environment , etc..
In short :a vector x=() of satisfaction determinants.

10. Indifference curves (1)
Respondents with different x may be equally happy.
Say, in the sample we find 100 respondents in the same response category. With different combinations of satisfaction determinants: x(1),…, x(100)
 The set of points {x(1),…, x(100)} in x –space constitutes a satisfaction indifference set.

11. Satisfaction Indifference Curvex1 x2
Satisfaction
We represent the persons as points in the x –space.

12. Indifference curves (2)
In case of response categories we have indifference bands.
An indifference curve is described by an equation f(x1,…, xk)=u,
where u stands for a specific level of satisfaction.
Linear indifference curves are described by α1x1+…+ αkxk+α0=u

13. Neo-classical & Happiness Economics
The x–variables are :
Neo-class: private goods & services bought on the market at market prices (e.g. cars, houses, medical services)
Happiness Economics also public goods (e.g. urban environment), and intangible circumstantial variables (e.g. health, age, social relations)
Identification:
Neo-class by marginal conditions, assuming respondent is in optimum situation.
Happiness Economics by means of satisfaction questions

14. Estimation of indifference curves
Various estimation methods yield essentially same outcome (Van Praag and Ferrer -i-Carbonell 2004,2007)
Ordinal (OP) and cardinal utility indicators
Cardinal Median Utility (CM)
Assume ordinal utility function:
U(inc,x)=N(αincln(inc)+α1x1+…+ αkxk+α0;0,σ)
Cardinalization:If response is = 7  set un=N-1(0.7)
Responses [0-10] replaced by their normal quantiles.
And we should get approximately:
To be estimated by OLS on

15. Example: Job satisfaction Estimated by 5 methods (GSOEP)

16. Coefficients normalized

17. Life & Domains Satisfactions
Life satisfaction can be decomposed into domains, the two– and multi–layer model
The satisfaction approach is applicable to domains of life.
Job satisfaction, but also satisfaction with health, financial situation, social relations, marriage, the government, housing situation, one's neighborhood & supply of urban amenities.

18. Domain satisfactions as components of satisfaction with life as a whole

19. Example: German sample from BvP,FiC,Happiness Quantified

20. Example: Costa Rica
Hall L.J.,Madrigal R., J. Robalino (CATIE, Costa Rica) (2008), "Quality of Life in Urban Neighbourhoods in Costa Rica", forthcoming in IDB-publication.

21. Index of Urban Quality Cardinal index per person
Assumption: cardinal interpersonal comparability
Su =Su(An,Zn)
urban amenities (An) & individual characteristics (Zn)
The quality of Lima may be evaluated by the inhabitants of Lima
Or by the inhabitants of Buenos Aires by

22. Separability of the index
Vignet analysis (cf. Kapteyn, Smith, Van Soest, AER 2007)

23. Conclusions Satisfaction measurement is possible
Without neo-classical behavioral assumptions
Natural extension of variables to non- market variables, external effects, rationing.
Indifference curves can be estimated
Wide variety of methods lead to the same result for trade-off estimates
Quality index requires a cardinalization
Further research necessary for practical implementation.