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Distributional aspects of the quality change bias in the CPI: evidence from Spain

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  • Ruiz-Castillo, Javier
  • Ley, Eduardo
  • Izquierdo, Mario

Abstract

In this paper we address the issue of the distributional consequences of the quality change bias (QCB) in the CPI. In particular, we assess the conjecture raised by some critics of the Boskin commission report that new products and goods affected by quality effects are disproportionately consumed by the rich. Our analysis begins with the observation that the CPI is a weighted mean of household-specific statistical price indexes, with weights proportional to household total expenditures. Then, we suggest a simple but powerful procedure to evaluate the distributional consequences of eliminating the QCB by examining its impact on two scalars: (1) the CPI plutocratic bias, and (2) the change in money inequality after compensating every household for her individual inflation rate. The empirical analysis combines the detailed information pertaining the size of the QCB for the U.S. with household-specific price indexes for Spain in 1973-74, 1980-81, and 1990-91. The results show that, as conjectured, the quality bias especially affects the richer households.
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  • Ruiz-Castillo, Javier & Ley, Eduardo & Izquierdo, Mario, 2002. "Distributional aspects of the quality change bias in the CPI: evidence from Spain," Economics Letters, Elsevier, vol. 76(1), pages 137-144, June.
    • Handle: RePEc:eee:ecolet:v:76:y:2002:i:1:p:137-144
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    2. Mark A. Wynne & Diego Rodriguez‐Palenzuela, 2004. "Measurement Bias in the HICP: What do we know and What do we need to know?," Journal of Economic Surveys, Wiley Blackwell, vol. 18(1), pages 79-112, February.
    3. Finn, Arden & Leibbrandt, Murray & Oosthuizen, Morne, 2014. "Poverty, inequality, and prices in post-apartheid South Africa," WIDER Working Paper Series 127, World Institute for Development Economic Research (UNU-WIDER).
    4. Guillermo E. Perry & Omar S. Arias & J. Humberto López & William F. Maloney & Luis Servén, 2006. "Poverty Reduction and Growth : Virtuous and Vicious Circles," World Bank Publications - Books, The World Bank Group, number 6997.
    5. Goni, Edwin & Lopez, Humberto & Serven, Luis, 2006. "Getting realabout inequality : evidence from Brazil, Colombia, Mexico, and Peru," Policy Research Working Paper Series 3815, The World Bank.
    6. Arden Finn & Murray Leibbrandt & Morné Oosthuizen, 2014. "Poverty, Inequality, and Prices in Post-Apartheid South Africa," WIDER Working Paper Series wp-2014-127, World Institute for Development Economic Research (UNU-WIDER).

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