This chapter addresses the fact that creating index numbers for settlement of contracts requires some judgement, and that no single method is likely to be applicable to all circumstances—there are trade-offs, and choices have to be made with limited information. Before applying a repeated-measures method like the ones defined in the preceding chapter, a decision has to be made as to whether there are enough repeated measures to ensure that the standard errors are not going to be too high, and whether there is enough unmeasured quality variation across subjects to warrant the increase in error variances caused by the addition of many subject dummies. A choice has to be made as to which kinds of hedonic variables, if any, to include in the analysis, and not all quality measures are appropriate for index number construction, so a choice needs to be made as to whether these variables or the subject dummies are to be constrained in any of various ways. Prior information of an imprecise nature may be used to put probabilistic, rather than rigid, restrictions on the regression coefficients. There are also some fundamentally different variants of the hedonic repeated-measures regression methods that could be considered, methods in which quality is inferred as an observed factor associated with each subject (factor analytic methods), and methods in which a separate selection equation is used to correct for possible selection bias in the mechanism by which it is determined which subjects are to be measured (selection bias correction methods).
Keywords: contract settlement, economic indices, error variances, factor analytic methods, hedonic repeated-measures indices, hedonic variables, index number construction, index numbers, quality measures, quality variation, repeated-measures indices, selection bias correction methods, standard errors, subject dummies