Working Paper: NBER ID: w2712
Authors: Daniel R. Feenberg; Harvey S. Rosen
Abstract: The paper discusses five early approaches to the price (and quantity) index number problem. The five approaches are: (1) the fixed basket approach; (ii) the statistical approach; (iii) the test or axiomatic approach; (iv) the Divisia approach and (v) the economic approach. The economic approach makes use of the assumption of optimizing behavior under constraint and the approach is discussed under four subtopics: (i) basic theoretical definitions; (ii) the theory of bounds; (iii) exact index numbers and (iv) econometric estimation of preferences. The paper also discusses several topics raised by Jack Triplett in a recent paper, including: (i) the merits of the test approach to index number theory, (ii) the chain principle and alternatives to it; (iii) the substitution bias and (iv) the new good bias. Although the paper is for the most part an extensive historical survey, there are a few new results in section 8 on multilateral alternatives to the chain principle. Also in section 6.3, it is shown that the Paasche, Laspeyres and all superlative indexes will satisfy the circularity test to the first order.
Keywords: income tax indexing; state tax policy; inflation; tax burden; fiscal policy
JEL Codes: H24; H71
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Elasticity of the tax system (H30) | Probability of adopting indexing (C43) |
| Per capita debt (H69) | Probability of adopting indexing (C43) |
| Progressive income tax structure (H19) | Probability of adopting indexing (C43) |
| Per capita debt (H69) | Probability of reneging on indexing promises (C78) |
| Tax or expenditure limitation statutes (H72) | Probability of reneging on indexing promises (C78) |