Hedonic prices for cars: an application to the Spanish car market, 1981-2005

Abstract

In this paper we provide a comparison of different formulations for hedonic regression analysis in order to construct a quality-adjusted price index for the Spanish car market over the period 1981-2005. Specifically, we address the issue of instability of coefficients over time, and propose two alternative estimation procedures based, firstly, on a moving sample of observations and, secondly, on a moving average of estimated coefficients in single period equations. The statistical tests applied support the proposed methodologies. On empirical grounds two conclusions can be emphasised. Firstly, our study concludes that, taking quality changes into account, car prices in Spain deflated by CPI declined by 40% between 1981 and 2005. This result is robust to the alternative estimation procedures employed in the study. Secondly, an analysis of sigma-convergence shows that for quality-adjusted prices a clear trend in σ-convergence emerges between 1986 and 1992, whereas such a trend does not exists for observed prices. This result has to be related to Spain’s integration into the European Comunity.