Construction Industry Productivity: Omitted Quality Characteristics in Construction Price Indices: Fid-Bau Portal

Construction Industry Productivity: Omitted Quality Characteristics in Construction Price Indices

Dyer, Bryan D. / Goodrum, Paul M.

In this paper, the writers present initial results of a larger study to examine the current hedonic regression model used by the Census Bureau to estimate this price index, which is used to help measure a significant proportion of the industry's real output. This study will compare the current hedonic model with a proposed model, which will include quality variables that are not part of the Census' current hedonic model. Previous research suggests that omitted quality variables in the Census' price index potentially leads to omitted variable bias which overestimates construction inflation leading to both an underestimate of construction industry output and productivity. However, previous research has not formalized necessary changes to the Census index to avoid this bias nor has the bias been actually measured in order to quantify its direction or magnitude. For this paper, price and quality data of new homes was collected from Multiple Listing Service data from Warren County, Kentucky for years 2002 through 2007, which was provided by the local Board of Realtors. The data was compiled to determine the frequency of additional quality characteristics currently not measured by the Census Bureau. By identifying quality characteristics that occur at a high frequency that are also not included in the current Census index for new homes, these results serve as a starting point for further research to determine if additional quality characteristics should be included in the model.