NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Exact Hedonic Price Indexes

Robert C. Feenstra

NBER Working Paper No. 5061
Issued in March 1995
NBER Program(s):   PR

The purpose of this paper is to identify conditions under which hedonic price indexes provide an exact measure of consumer welfare. Our results provide a rationale for existing practices in the case where prices equal marginal costs. In that case, both the marginal value of characteristics and a fixed-weight price index can be estimated from a hedonic regression. Using the marginal value of characteristics, we show how to construct bounds on the exact hedonic price index. When prices are above marginal costs then our bounds still apply, but the value of characteristics cannot be measured so easily. Since the price-cost markups are an omitted variable in the hedonic regression, they will bias the coefficients obtained. For a special class of utility functions, we argue that a linear regression will still provide a measure of the marginal value of characteristics, but a log-linear regression will overstate these values.

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Document Object Identifier (DOI): 10.3386/w5061

Published: Review of Economics and Statistics, Vol. 77, no. 4 (November 1995): 634-653 . citation courtesy of

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