Age effects, unobserved characteristics and hedonic price indexes: The Spanish car market in the 1990sReport as inadecuate

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, Volume 5, Issue 4, pp 419–455

First Online: 26 April 2014Received: 19 February 2012Accepted: 21 March 2014


This paper computes and compares alternative quality-adjusted price indexes for new cars in Spain in the period 1990–2000. The proposed hedonic approach simultaneously controls for time-invariant unobserved product effects and age effects, that can be interpreted as a proxy for time-variant unobservables. The results show that the non-adjusted price index largely overstates the increase in the cost of living induced by changes in car prices and that the previous evidence for this market has not measured the real extent of that bias, probably due to the omission of controls for unobservables. It is also shown that omitting age effects can lead to misleading conclusions. In particular, their omission would imply that the year-on-year Spanish Consumer Price Index would have been overestimated by around \0.1~\%\ on average during the sample period. Excluding both the controls for age effects and time-invariant unobservables would have increased this bias to \0.2~\%\. The estimated price indexes give also some insights on what could have been the determinants of price evolution in the Spanish car market.

KeywordsHedonic price indexes Spanish car market Car prices IPC CPI Cost of living Electronic supplementary materialThe online version of this article doi:10.1007-s13209-014-0108-8 contains supplementary material, which is available to authorized users.

The research work of this paper was performed while the author was at Universitat Rovira i Virgili, Departament d’Economia, CREIP, GRIT. I would like to thank the editor-in-chief Víctor Aguirregabiria, one anonymous referee and Francisco Requena-Silvente for very helpful comments, and participants at the XV Encuentro de Economía Aplicada A Coruña, the 2012 Annual Congress of the European Economic Association Málaga, and at the XXXVII Symposium of the Spanish Economic Association Vigo.

The information and views set out in this paper are those of the author and do not necessarily reflect the official opinion of the European Union. Neither the European Union institutions and bodies nor any person acting on their behalf may be held responsible for the use which may be made of the information contained therein.

JEL ClassificationC43 E31 L11 L13  Download fulltext PDF

Author: Xosé-Luís Varela-Irimia


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