Working Paper: NBER ID: w8715
Authors: Ariel Pakes
Abstract: This paper provides a justification for hedonic price indices and details the properties of hedonic price functions. The analysis is done in a market setting in which a finite number of goods, each defined by its characteristics, interact. We note that proper hedonic indices can be constructed from the same data currently used to construct matched model indices. Since the matched model index does not incorporate price changes for goods which exit, and the goods that exited tend to be those goods whose prices fall, the matched model index has a selection problem which biases it upwards. The hedonic index does not have this problem. We illustrate with a new study of price indices for PC's. The hedonic index shows steep price declines in every year. On average, the matched model indices indicate no price fall at all and one commonly used matched model index is negatively correlated with the hedonic. We also construct and compare alternative price indices used either in research or by the federal statistical agencies. Of these the one that seems to work well is a Pasche style hedonic. Its advantage is that since it does not require computation of the current period's hedonic function, it is easier to use when monthly timetables need to be met.
Keywords: No keywords provided
JEL Codes: C8; L0
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Hedonic index (C43) | Accurate reflection of price declines (G19) |
| Matched model index (C52) | Upward bias in price representation (E30) |
| Matched model index does not incorporate price changes for goods that exit the market (E30) | Upward bias (C51) |
| Hedonic index shows steep price declines (E30) | Matched model index indicates no price fall (E30) |
| Matched model index (C52) | Negative correlation with hedonic index (D11) |
| Pasche-style hedonic index (C43) | Good performance against other indices (G19) |