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Substitution Bias and the Construction of a Spatial Cost of Living Index

Author

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  • Dusan Paredes

    (IDEAR - Department of Economics, Universidad Católica del Norte - Chile)

  • Víctor Iturra

    (IDEAR - Department of Economics, Universidad Católica del Norte - Chile)

Abstract

We estimate the spatial substitution bias based on the difference between a price index and the true cost of living. We estimate the substitution bias for several different geographical scales, using different base baskets and across several spending quartiles. Our results show a significant substitution bias for small geographic units. The choice of the base basket is relevant for the estimation of the bias. Finally, the spatial substitution bias is higher for higher level quartiles due to the heterogeneity in the consumption basket. This exercise shows how the spatial dimension modifies the construction of a price index. Moreover, the approach of fixed baskets (the axiomatic approach) should be carefully considered in the estimation of spatial price differentials.

Suggested Citation

  • Dusan Paredes & Víctor Iturra, 2011. "Substitution Bias and the Construction of a Spatial Cost of Living Index," Documentos de Trabajo en Economia y Ciencia Regional 13, Universidad Catolica del Norte, Chile, Department of Economics, revised May 2011.
    • Handle: RePEc:cat:dtecon:dt201103
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    References listed on IDEAS

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    Cited by:

    1. Manami Ogura, 2022. "Shrinkage of regional differences in the cost‐of‐living index in Japan," Australian Economic Papers, Wiley Blackwell, vol. 61(2), pages 337-364, June.
    2. Scott Loveridge & Dusan Paredes, 2018. "Are Rural Costs of Living Lower? Evidence from a Big Mac Index Approach," International Regional Science Review, , vol. 41(3), pages 364-382, May.
    3. Elena Lasarte Navamuel & Dusan Paredes & Esteban Fernández Vázquez, 2012. "A true cost of living index for Spain using a microeconomic approach and censored data," Documentos de Trabajo en Economia y Ciencia Regional 26, Universidad Catolica del Norte, Chile, Department of Economics, revised Aug 2012.
    4. Laura H. Atuesta & Dusan Paredes Araya, 2012. "A spatial cost of living index for Colombia using a microeconomic approach and censored data," Applied Economics Letters, Taylor & Francis Journals, vol. 19(18), pages 1799-1805, December.
    5. Dusan Paredes, 2012. "Spatial wage disparities and the role of spatial labor sorting," Documentos de Trabajo en Economia y Ciencia Regional 28, Universidad Catolica del Norte, Chile, Department of Economics, revised Sep 2012.
    6. Dusan Paredes, 2015. "Can Neg Explain the Spatial Distribution of Wages of Chile?," Tijdschrift voor Economische en Sociale Geografie, Royal Dutch Geographical Society KNAG, vol. 106(1), pages 65-77, February.
    7. Juan Soto & Dusan Paredes, 2016. "Cities, Wages, And The Urban Hierarchy," Journal of Regional Science, Wiley Blackwell, vol. 56(4), pages 596-614, September.
    8. Paredes, Dusan & Iturra, Victor, 2012. "Market access and wages: A spatially heterogeneous approach," Economics Letters, Elsevier, vol. 116(3), pages 349-353.
    9. Víctor Iturra & Dusan Paredes, 2014. "Construction of a Spatial Housing Price Index by Estimating an Almost Ideal Demand System," Tijdschrift voor Economische en Sociale Geografie, Royal Dutch Geographical Society KNAG, vol. 105(3), pages 301-314, July.
    10. Chun-Chang Lee & Chih-Min Liang & Cheng-Huang Tung & Yu-Jian Lu, 2018. "The Impact of Luxury Housing on Neighborhood Housing Prices in Taipei City," Asian Economic and Financial Review, Asian Economic and Social Society, vol. 8(10), pages 1211-1225, October.
    11. Dusan Paredes & Victor Iturra & Marcelo Lufin, 2012. "A further step to understand income inequality in Chile: A decomposition using three-stages nested Theil index decomposition method," Documentos de Trabajo en Economia y Ciencia Regional 25, Universidad Catolica del Norte, Chile, Department of Economics, revised Aug 2012.

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    More about this item

    Keywords

    Housing cost; Cost of living; Laspeyres index; Substitution bias;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • R21 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Household Analysis - - - Housing Demand

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