Ernst Berndt and Zvi Griliches SBR-9511550 This proposal will continue ongoing research into the incorporation of technical change into price indexes. This is an important practical issue since the failure to account for changing quality is thought to be the largest source of bias in aggregate price indexes. And price indexes are used for such important tasks as the adjustment of social security payments to offset inflation, the implementation of cost-of-living clauses in union labor contracts, and the setting of monetary policy. The key problem in accounting for changes in quality is the determination of pre-introduction reservation prices for new goods. The proposal reviews a number of ways of doing this. These include using hedonic regressions, comparing branded and generic good prices, and estimating differentiated demand models. The P.I.s will implement these various approaches using data on pharmaceutical products and personal computers. In addition, they will seek out other data sources, such as scanner data.
