. "4 Evolving Market Baskets: Adjusting Indexes to Account for Quality Change." At What Price?: Conceptualizing and Measuring Cost-of-Living and Price Indexes. Washington, DC: The National Academies Press, 2002.
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At What Price?: Conceptualizing and Measuring Cost-of-Living and Price Indexes
2000:10). Of course, the way a model is specified affects where the line of comparability will be drawn, and it has not been established that the statistical procedure is an improvement over the standard process, particularly if the hedonic regressions are estimated by analysts who know little about the products being adjusted. It is essential that the expert judgment of commodity specialists be retained and perhaps supplemented with that of other product and marketing specialists.
The fact that hedonic methods have produced item comparability judgments that are different from those made in conjunction with deletion methods is a concern (relevant to either method) for several reasons. First and most obviously, different judgments about comparability lead to different rates of quality adjustment, which has obvious implications for index performance—more price adjustments translate into a decreased rate of index growth. Second, the empirical work produced from the recent initiative indicates that price change associated with the comparable substitute quotes can also be significantly affected by the choice of quality adjustment technique. For instance, the 67 directly compared (non-adjusted) VCR price substitutions produced for the published class-mean adjusted index decreased by 3.72 percent; the 83 directly compared price substitutions left over after hedonic adjustments were added decreased by only 1 percent. It is not intuitively obvious why the choice of noncomparable quality adjustment method should have such a large effect on the price change of the subset of comparable substitute quotes. Documentation supporting BLS research does not adequately explain the effect on comparables that results from switching quality adjustment methods.
These criticisms aside, the move toward supplementing judgment—both formal and informal—with replicable, systematic methods of comparing non-identical items is a move in the right direction. Econometric analyses of data that indicate how characteristics are correlated with price change have the potential to improve the ability of BLS analysts to determine what is and is not a comparable substitution. Even if a particular hedonic study is not convincing enough to be used for quality adjustment, it may still offer insights that improve analysts’ informal decision making. Statistical audits provide evidence about the variance that arises when different researchers, using the same data, attempt to replicate quality adjustments (Triplett, 2001b:9).
The incorporation of recent BLS hedonics research into the CPI has not produced evidence for the conclusions offered by the Boskin commission and others about the extent to which quality change biases the CPI when used as an approximation to a COLI. The research indicates, at least, that the commission underestimated the effect on the index of implicit quality adjustment measures already in place. Moreover, even a substantial expansion of hedonics, used as the