We estimate the spatial substitution bias based on the difference between a price index (PI) and the true cost of living (COL). This bias is computed at three geographical scales, using several fixed baskets and across different expenditures quartiles. Our results show a significant substitution bias for small geographical units. The choice of the base basket is also relevant for the bias estimation. Finally, the spatial substitution bias is larger for upper side of the expenditure distribution due to the heterogeneity in the consumption basket. This exercise shows that the spatial dimension affects the construction of a price index and that the approach of fixed baskets should be carefully considered in the estimation of spatial price differentials.
JEL classification: R21, C36
The aim of this paper is to build, for the first time, a spatial housing price index for the Chilean communities. The first step is to recover hedonic prices of three housing attributes by estimating a mixed index model using a generalised method of moments (GMM) procedure. Second, a censored almost ideal demand system is estimated to build expenditures for every community and to compare them among different spatial units, while maintaining a constant utility level. Using micro data from the 2009 CASEN survey, we show that there are important differences in the expenditure of a consumer in Santiago to access the same level of welfare in another community in the country and there are important differences in housing prices among Chilean communities
We empirically test the positive relationship between market access and wages stated by New Economic Geography. Contrary to most estimation in other countries, we find evidence of significant spatial heterogeneity of this elasticity across Chilean communities.
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