IDEAS home Printed from https://ideas.repec.org/p/cat/dtecon/dt201103.html

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

Author

Listed:
  • 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
    as

    Download full text from publisher

    File URL: https://sites.google.com/a/ucn.cl/wpeconomia/archivos/WP2011-03.pdf
    File Function: First version, 2011
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Pollak, Robert A., 1989. "The Theory of the Cost-of-Living Index," OUP Catalogue, Oxford University Press, number 9780195058703.
    2. Roger J. Bowden, 1992. "Competitive Selection and Market Data: The Mixed-Index Problem," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 59(3), pages 625-633.
    3. Timmins, Christopher, 2006. "Estimating spatial differences in the Brazilian cost of living with household location choices," Journal of Development Economics, Elsevier, vol. 80(1), pages 59-83, June.
    4. Topel, Robert H & Rosen, Sherwin, 1988. "Housing Investment in the United States," Journal of Political Economy, University of Chicago Press, vol. 96(4), pages 718-740, August.
    5. Combes, Pierre-Philippe & Duranton, Gilles & Gobillon, Laurent, 2008. "Spatial wage disparities: Sorting matters!," Journal of Urban Economics, Elsevier, vol. 63(2), pages 723-742, March.
    6. Dusan Paredes & Patricio Aroca, 2008. "Metodología para Estimar un Indice Regional de Costo de Vivienda en Chile," Latin American Journal of Economics-formerly Cuadernos de Economía, Instituto de Economía. Pontificia Universidad Católica de Chile., vol. 45(131), pages 129-143.
    7. 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.
    8. 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.
    9. Rosen, Sherwin, 1974. "Hedonic Prices and Implicit Markets: Product Differentiation in Pure Competition," Journal of Political Economy, University of Chicago Press, vol. 82(1), pages 34-55, Jan.-Feb..
    10. Koo, Jahyeong & Phillips, Keith R & Sigalla, Fiona D, 2000. "Measuring Regional Cost of Living," Journal of Business & Economic Statistics, American Statistical Association, vol. 18(1), pages 127-136, January.
    11. Braithwait, Steven D, 1980. "The Substitution Bias of the Laspeyres Price Index: An Analysis Using Estimated Cost-of-Living Indexes," American Economic Review, American Economic Association, vol. 70(1), pages 64-77, March.
    12. Dusan Paredes, 2011. "A methodology to compute regional housing price index using matching estimator methods," The Annals of Regional Science, Springer;Western Regional Science Association, vol. 46(1), pages 139-157, February.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    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. 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.
    4. 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.
    5. 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.
    6. 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.
    7. Paredes, Dusan & Iturra, Victor, 2012. "Market access and wages: A spatially heterogeneous approach," Economics Letters, Elsevier, vol. 116(3), pages 349-353.
    8. 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.
    9. Alberto Díaz-Dapena & Scott Loveridge & Dusan Paredes, 2024. "Identifying the size and geographic scope of short-term rural cost-of-living increases in the United States," The Annals of Regional Science, Springer;Western Regional Science Association, vol. 72(4), pages 1329-1351, April.
    10. 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.
    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.
    12. Juan Soto & Dusan Paredes, 2016. "Cities, Wages, And The Urban Hierarchy," Journal of Regional Science, Wiley Blackwell, vol. 56(4), pages 596-614, September.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. 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.
    2. Atuesta, Laura & Paredes, Araya, 2011. "A Spatial Cost of Living Index for Colombia using a Microeconomic Approach and Censored Data," MPRA Paper 30580, University Library of Munich, Germany.
    3. 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.
    4. Dusan Paredes Araya & Tomothy M Komarek, 2013. "Spatial Income Inequality in Chile and the Rol of Spatial Labor Sorting," Documentos de Trabajo en Economia y Ciencia Regional 46, Universidad Catolica del Norte, Chile, Department of Economics, revised Apr 2013.
    5. 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.
    6. Luis Galvis & Bladimir Carrillo, 2013. "Índice de precios espacial para la vivienda urbana en Colombia: una aplicación con métodos de emparejamiento," Revista de Economía del Rosario, Universidad del Rosario.
    7. Susana Katherine Chacón Espejo & Dusan Paredes Araya, 2013. "Spatial Income Inequality in Chile and the Rol of Spatial Labor Sorting," Documentos de Trabajo en Economia y Ciencia Regional 46, Universidad Catolica del Norte, Chile, Department of Economics, revised Apr 2013.
    8. Lopez, Esteban & Hewings, Geoffrey J.D., 2018. "Housing price indices for small spatial units," Regional Science and Urban Economics, Elsevier, vol. 70(C), pages 57-71.
    9. Dusan Paredes, 2010. "The Role of Regional Price Index in New Economic Geography Models," Documentos de Trabajo en Economia y Ciencia Regional 07, Universidad Catolica del Norte, Chile, Department of Economics, revised Dec 2010.
    10. Susana Katherine Chacón Espejo & Dusan Paredes Araya, 2013. "Income Inequality in Chile and the Rol of Spatial Labor Sorting," Documentos de Trabajo en Economia y Ciencia Regional 46, Universidad Catolica del Norte, Chile, Department of Economics, revised Apr 2013.
    11. Edgar O. Olsen & Dirk W. Early & Paul E. Carrillo, 2012. "This paper documents the production of a panel of price indices for housing services, other produced goods, and all produced goods for each metropolitan area in the United States and the non-metropoli," Virginia Economics Online Papers 402, University of Virginia, Department of Economics.
    12. Richard K. Green & Patric Hendershott, 1992. "Demographic Factors and Real House Prices," Wisconsin-Madison CULER working papers 92-08, University of Wisconsin Center for Urban Land Economic Research.
    13. Lars Nesheim, 2006. "Hedonic price functions," CeMMAP working papers CWP18/06, Centre for Microdata Methods and Practice, Institute for Fiscal Studies.
    14. Wei-Bin Zhang, 2017. "Spatial Agglomeration And Economic Development With The Inclusion Of Interregional Tourism," Economic Annals, Faculty of Economics and Business, University of Belgrade, vol. 62(213), pages 93-128, April - J.
    15. Lieu, Pang-Tien & Liang, Jung-Hui & Chen, Jui-Hui, 2008. "Consumer preferences and cost of living in Taiwan," Journal of Asian Economics, Elsevier, vol. 19(3), pages 224-235, June.
    16. David Prentice & Xiangkang Yin, 2000. "Measuring Quality-Adjusted Inflation Rates for a Heterogeneous Oligopoly," Working Papers 2000.06, School of Economics, La Trobe University.
    17. Victor Ginsburgh & Jianping Mei & Michael Moses, 2006. "On the computation of art indices in art," ULB Institutional Repository 2013/7290, ULB -- Universite Libre de Bruxelles.
    18. Fally, Thibault & Paillacar, Rodrigo & Terra, Cristina, 2010. "Economic geography and wages in Brazil: Evidence from micro-data," Journal of Development Economics, Elsevier, vol. 91(1), pages 155-168, January.
    19. Marshall Reinsdorf & Jack E. Triplett, 2009. "A Review of Reviews: Ninety Years of Professional Thinking About the Consumer Price Index," NBER Chapters, in: Price Index Concepts and Measurement, pages 17-83, National Bureau of Economic Research, Inc.
    20. Gilles Duranton, 2007. "From cities to productivity and growth in developing countries," Working Papers tecipa-306, University of Toronto, Department of Economics.

    More about this item

    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

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:cat:dtecon:dt201103. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Benjamin Jara The email address of this maintainer does not seem to be valid anymore. Please ask Benjamin Jara to update the entry or send us the correct address (email available below). General contact details of provider: https://edirc.repec.org/data/ieucncl.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.