Abstract
This paper studies alternative cost-of-living indexes derived from the generalized Fechner-Thurstone (GFT) utility form, their use in contracts for cost-of-living adjustments (COLAs), and the resulting effect of choice of index on the distribution of real income. The indexes and their distributional effects are compared to the officially reported Consumer Price Index (CPI) and a CPI computed from the same data set used to compute the GFT indexes. It is found that the choice of index used in adjustment clauses in contracts has an impact on the distribution of real income of the group. As an example, the U.S. federal government schedule of wages and salaries is adjusted from 1981 through 1984 by all of the indexes reported here. Use of alternative indexes illuminates the normative assumptions regarding the relative importance of different income strata (among other things) implicit in any public practice of pegging COLAs to a single form of price index.
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We wish to thank Mason Gerety and Kathy Hayes for helpful criticisms of the first drafts of this paper.
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Basmann, R.L., Diamond, C.A., Scully, G.W. et al. The political market for real income redistribution through choice of the weights in COLAs. Public Choice 64, 103–120 (1990). https://doi.org/10.1007/BF00153158
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DOI: https://doi.org/10.1007/BF00153158