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Constructing Quality Adjusted Price Indexes: a Comparison of Hedonic and Discrete Choice Models

  • N. Jonker

The Boskin report (1996) concluded that the US consumer price index (CPI) overestimated the inflation by 1.1 percentage points. This was due to several measurement errors in the CPI. One of them is called quality change bias. In this paper two methods are compared which can be used to eliminate quality change bias, namely the hedonic method and a method based on the use of discrete choice models. The underlying micro-economic fundations of the two methods are compared as well as their empirical implementation. Although the discrete choice model has not often been used in order to calculate quality adjusted price indexes it seems to be quite promising to do so.

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Paper provided by Netherlands Central Bank, Research Department in its series WO Research Memoranda (discontinued) with number 673.

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Date of creation: 2001
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Handle: RePEc:dnb:wormem:673
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  1. Amil Petrin, 2001. "Quantifying the Benefits of New Products: The Case of the Minivan," NBER Working Papers 8227, National Bureau of Economic Research, Inc.
  2. Berry, Steven & Levinsohn, James & Pakes, Ariel, 1995. "Automobile Prices in Market Equilibrium," Econometrica, Econometric Society, vol. 63(4), pages 841-90, July.
  3. Diewert, W. E., 1976. "Exact and superlative index numbers," Journal of Econometrics, Elsevier, vol. 4(2), pages 115-145, May.
  4. W. Erwin Diewert, 2003. "Hedonic Regressions. A Consumer Theory Approach," NBER Chapters, in: Scanner Data and Price Indexes, pages 317-348 National Bureau of Economic Research, Inc.
  5. Aviv Nevo, 2001. "New Products, Quality Changes and Welfare Measures Computed From Estimated Demand Systems," NBER Working Papers 8425, National Bureau of Economic Research, Inc.
  6. Cropper, Maureen L, et al, 1993. "Valuing Product Attributes Using Single Market Data: A Comparison of Hedonic and Discrete Choice Approaches," The Review of Economics and Statistics, MIT Press, vol. 75(2), pages 225-32, May.
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