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Distributional aspects of the quality change bias in the CPI: Evidence from Spain

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  • Javier Ruiz Castillo
  • Eduardo Ley
  • Mario Izquierdo

Abstract

In this paper we address the issue of the distributional consequences of the quality change bias (QCB) in the CPI. In particular, we assess the conjecture raised by some critics of the Boskin commission report that new products and goods affected by quality effects are disproportionately consumed by the rich. Our analysis begins with the observation that the CPI is a weighted mean of household-specific statistical price indexes, with weights proportional to household total expenditures. Then, we suggest a simple but powerful procedure to evaluate the distributional consequences of eliminating the QCB by examining its impact on two scalars: (1) the CPI plutocratic bias, and (2) the change in money inequality after compensating every household for her individual inflation rate. The empirical analysis combines the detailed information pertaining the size of the QCB for the U.S. with household-specific price indexes for Spain in 1973-74, 1980-81, and 1990-91. The results show that, as conjectured, the quality bias especially affects the richer households.

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Paper provided by FEDEA in its series Working Papers with number 2000-08.

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Handle: RePEc:fda:fdaddt:2000-08

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  1. Robert A. Pollak, 1998. "The Consumer Price Index: A Research Agenda and Three Proposals," Journal of Economic Perspectives, American Economic Association, vol. 12(1), pages 69-78, Winter.
  2. Cowell, Frank A. & Kuga, Kiyoshi, 1981. "Additivity and the entropy concept: An axiomatic approach to inequality measurement," Journal of Economic Theory, Elsevier, vol. 25(1), pages 131-143, August.
  3. Brent R. Moulton & Karin E. Moses, 1997. "Addressing the Quality Change Issue in the Consumer Price Index," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 28(1), pages 305-366.
  4. Javier Ruiz-Castillo & Eduardo Ley & Mario Izquierdo, . "The plutocratic bias in the CPI: Evidence from Spain," Studies on the Spanish Economy 60, FEDEA.
  5. Robert T. Michael, 1979. "Variation Across Household in the Rate of Inflation," NBER Working Papers 0074, National Bureau of Economic Research, Inc.
  6. Javier Ruiz Castillo & Eduardo Ley & Mario Izquierdo, . "The laspeyres bias in the Spanish consumer price index," Working Papers 2000-05, FEDEA.
  7. Thesia I. Garner & Javier Ruiz-Castillo & Mercedes Sastre, 2003. "The Influence of Demographics and Household-Specific Price Indices on Consumption-Based Inequality and Welfare: A Comparison of Spain and the United States," Southern Economic Journal, Southern Economic Association, vol. 70(1), pages 22-48, July.
  8. Coulter, Fiona A E & Cowell, Frank A & Jenkins, Stephen P, 1992. "Differences in Needs and Assessment of Income Distributions," Bulletin of Economic Research, Wiley Blackwell, vol. 44(2), pages 77-124, April.
  9. Hagemann, Robert P, 1982. "The Variability of Inflation Rates across Household Types," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 14(4), pages 494-510, November.
  10. Muellbauer, John, 1974. "Inequality Measures, Prices and Household Composition," Review of Economic Studies, Wiley Blackwell, vol. 41(4), pages 493-504, October.
  11. Shorrocks, Anthony F, 1984. "Inequality Decomposition by Population Subgroups," Econometrica, Econometric Society, vol. 52(6), pages 1369-85, November.
  12. Michael J. Boskin, 1998. "Consumer Prices, the Consumer Price Index, and the Cost of Living," Journal of Economic Perspectives, American Economic Association, vol. 12(1), pages 3-26, Winter.
  13. Jeffrey A. Mills & Sourushe Zandvakili, 1999. "Statistical Inference via Bootstrapping for Measures of Inequality," Macroeconomics 9902003, EconWPA.
  14. Angus Deaton, 1998. "Getting Prices Right: What Should Be Done?," Journal of Economic Perspectives, American Economic Association, vol. 12(1), pages 37-46, Winter.
  15. Coulter, Fiona A E & Cowell, Frank A & Jenkins, Stephen P, 1992. "Equivalence Scale Relativities and the Extent of Inequality and Poverty," Economic Journal, Royal Economic Society, vol. 102(414), pages 1067-82, September.
  16. Buhmann, Brigitte, et al, 1988. "Equivalence Scales, Well-Being, Inequality, and Poverty: Sensitivity Estimates across Ten Countries Using the Luxembourg Income Study (LIS) Database," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 34(2), pages 115-42, June.
  17. Theil, Henri, 1979. "Variations across households in the rate of inflation," Economics Letters, Elsevier, vol. 4(1), pages 37-39.
  18. Michael, Robert T, 1979. "Variation across Households in the Rate of Inflation," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 11(1), pages 32-46, February.
  19. Gordon, Robert J & Griliches, Zvi, 1997. "Quality Change and New Products," American Economic Review, American Economic Association, vol. 87(2), pages 84-88, May.
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Cited by:
  1. José Julián Escario & José Alberto Molina, . "Do tobacco taxes reduce lung cancer mortality?," Working Papers 2000-17, FEDEA.
  2. Goni, Edwin & Lopez, Humberto & Serven, Luis, 2006. "Getting realabout inequality : evidence from Brazil, Colombia, Mexico, and Peru," Policy Research Working Paper Series 3815, The World Bank.
  3. Dolado, Juan José & Felgueroso, Florentino & Jimeno, Juan F., . "Female Employment and Occupational Changes in the 1990s: How is the EU Performing Relative to the US?," Open Access publications from Universidad Carlos III de Madrid info:hdl:10016/3264, Universidad Carlos III de Madrid.
  4. Javier Ruiz-Castillo & Mario Izquierdo & Eduardo Ley, . "The plutocratic bias in the CPI: Evidence from Spain (El sesgo plutocrático del IPC: Evidencia española.)," Working Papers 99-15, FEDEA.

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