Hedonic Regressions

Abstract

This chapter evaluates the foundations of hedonic price adjustment. It demonstrates how simple linear models are hard to justify with economic theory, and that the traditional practice of statistical agencies replicates exact hedonics under some circumstances. The three most ordinarily employed functional forms in the hedonic regression literature are the log-log, the semilog, and the linear. None of the three hedonic regression models presented totally dominates the remaining two models. Each of the three models has two favorable characteristics and one unfavorable characteristic. It is noted that the new indexes do not discard any relevant price and quantity information and hence can be more “accurate” in some sense. The estimates of aggregate price change in the hedonic commodity will in general not be invariant to the choice of the reference model. The use of quantity weights in hedonic regression models is strongly recommended if possible.

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