Estimates of Spatial Prices in India and their Sensitivity to Alternative Estimation Methods and Choice of Items

This paper provides Indian evidence on sub-national PPP s that point to considerable spatial price heterogeneity within the country. This paper shows that the CPD model, proposed in the cross country context, can be adapted to the household context to estimate spatial prices in the intra country context. The proposed CPD based model is shown to be formally equivalent to certain well known fixed weight price indices under certain parametric configurations. The empirical contribution includes a systematic comparison between the spatial price indices from alternative models, namely the CPD and utility based models, and the result that the utility based methods point to a much greater extent of spatial price heterogeneity than is suggested by the CPD type models. The results also record the sensitivity of the spatial price indices to the choice of items in the utility based approach. The pair wise comparison of estimates suggests that item selection may be more important than model selection in its impact on the spatial price estimates, though the latter is important as well. The study provides estimates of rural urban differentials in spatial price indices that suggest some interesting differences between the constituent states. The results make a strong case for further research on the topic of sub-national PPPs in the context of large heterogeneous countries.