Ariel Pakes' Half-Century of Groundbreaking Work on Product Markets

Ariel Pakes is an economist's economist who has spent his 50-year career studying product markets. He has co-authored foundational papers that redefined how subsequent researchers model both supply and demand sides of these markets. Pakes' methods have been applied in various practical settings, including boardrooms, courtrooms, and government institutions.

Pakes was interviewed by the Federal Reserve Bank of Minneapolis about his work on empirical industrial organization (IO). He discussed how he developed a framework to measure inflation using hedonics, which involves adjusting for product quality changes. This method has been adopted in many categories of the consumer price index (CPI) and the personal consumption expenditures price index.

However, Pakes pointed out that the CPI is still flawed, particularly when it comes to indexing poverty levels and entitlement programs. He argued that the CPI uses aggregate weights based on a random sample of the population, which may not accurately reflect the purchasing habits of those who rely on these programs.