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Measuring the Welfare Effect of Quality Change: Theory and Application of Japanese Autos

  • Robert C. Feenstra

The purpose of this paper is to identify conditions under which hedonic price indexes provide an exact measure of consumer welfare, so that the welfare effects of quality change can be inferred. Our results are quite positive in providing a rational for existing practices, though the conditions needed to justify these practices are somewhat restrictive. An application of our results is provided to the increase in characteristics of Japanese autos sold in the United States following the imposition of quotas in 1981. We argue that consumers did not value the additional characteristics at their former shadow-values, but rather, attached a lower value to the increase in characteristics. We compute the exact index that reflects this lower imputed value, and compare it to the conventional quality adjustment. The deadweight loss associated with the quality change is between one-quarter and one-third of the value of upgrading.

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File URL: http://www.nber.org/papers/w4401.pdf
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 4401.

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Date of creation: Jul 1993
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Handle: RePEc:nbr:nberwo:4401
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  1. 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..
  2. Kala Krishna, 1985. "Tariffs vs. Quotas with Endogenous Quality," NBER Working Papers 1535, National Bureau of Economic Research, Inc.
  3. Swan, Peter L, 1970. "Durability of Consumption Goods," American Economic Review, American Economic Association, vol. 60(5), pages 884-94, December.
  4. Zvi Griliches, 1991. "Hedonic Price Indexes and the Measurement of Capital and Productivity: Some Historical Reflections," NBER Chapters, in: Fifty Years of Economic Measurement: The Jubilee of the Conference on Research in Income and Wealth, pages 185-206 National Bureau of Economic Research, Inc.
  5. Diewert, W Erwin, 1978. "Superlative Index Numbers and Consistency in Aggregation," Econometrica, Econometric Society, vol. 46(4), pages 883-900, July.
  6. W. Erwin Diewert, 1980. "Aggregation Problems in the Measurement of Capital," NBER Chapters, in: The Measurement of Capital, pages 433-538 National Bureau of Economic Research, Inc.
  7. Abel, Andrew B, 1983. "Market Structure and the Durability of Goods," Review of Economic Studies, Wiley Blackwell, vol. 50(4), pages 625-37, October.
  8. Diewert, W. E., 1976. "Exact and superlative index numbers," Journal of Econometrics, Elsevier, vol. 4(2), pages 115-145, May.
  9. Randi Boorstein & Robert C. Feenstra, 1987. "Quality Upgrading and its Welfare Cost in U.S. Steel Imports, 1969-74," NBER Working Papers 2452, National Bureau of Economic Research, Inc.
  10. Feenstra, Robert C, 1988. "Quality Change under Trade Restraints in Japanese Autos," The Quarterly Journal of Economics, MIT Press, vol. 103(1), pages 131-46, February.
  11. Carlos Alfredo Rodriguez, 1979. "The Quality of Imports and the Differential Welfare Effects of Tariffs, Quotas, and Quality Controls as Protective Devices," Canadian Journal of Economics, Canadian Economics Association, vol. 12(3), pages 439-49, August.
  12. Simon P. Anderson & Andre de Palma & Jacques-Francois Thisse, 1987. "Demand for Differentiated Products," Discussion Papers 726, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  13. A. Michael Spence, 1975. "Monopoly, Quality, and Regulation," Bell Journal of Economics, The RAND Corporation, vol. 6(2), pages 417-429, Autumn.
  14. Timothy F. Bresnahan & Dennis A. Yao, 1985. "The Nonpecuniary Costs of Automobile Emissions Standards," RAND Journal of Economics, The RAND Corporation, vol. 16(4), pages 437-455, Winter,.
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