evidence on this topic not only on the welfare measurement domain but also in many others, including National Accounts, Consumer Price Index, Purchasing Power Parity and Income Taxation. Although progress has been made over the years, problems remain and great care must be taken to avoid erroneous interpretations of the results in cases where such imputations have an important effect on the total consumption measure or on the welfare rankings of households.

The objective of this paper is twofold. The first is to provide a comprehensive description of different methods used to impute rent for owner-occupied dwellings and non-market tenants; and the second is to present the distributional impacts of rent imputation discussed in the literature. The paper is organized as follows: section 2 focuses on the first objective by covering econometric methods, selfassessment as well as using information from external sources. Section 3 illustrates how other economic disciplines deal with this issue. Section 4 explains the impact of rent imputation on welfare measures by defining first a theoretical framework and then summarizing the findings in the literature. Section 5 presents concluding remarks.

# **2 Imputing flow-service of the dwelling for owners**

In the case of dwellings as in many other major durable goods, expenditure and consumption are not closely related in the short run and the former is a poor measure of household’s welfare.<sup>7</sup> The utility generated by housing is the value of the flow of services that the household receives from occupying its dwelling. Thus, a measure of flow of the dwelling’s service must be included as part of the total household’s consumption. It is fairly accepted that for tenants this flow of services is well approximated by the rent paid. However, rental values are observed only for tenants and not for owner-occupied dwellings. A way to solve this problem and to get a comprehensive measure of consumption is to estimate the implicit rent of owner-occupied housing by means of some imputation method. In the following, we present a thorough review of these methods implemented in the literature starting from the econometric and statistical methods up to self-assessment and use of external sources.

## **2.1 Econometric and statistical methods**

The Hedonic Theory of Consumption is the theoretical justification of all econometric models that have been estimated in the rent-imputation literature. This theory establishes that utility derives from attributes or characteristics of goods and not from goods _per se_ (Lancaster, 1966). In equilibrium, hedonic prices are defined as the implicit prices of the goods’ attributes. These implicit prices are revealed to economic agents from observed prices of differentiated products and specific amounts of characteristics associated with them (Rosen, 1974).<sup>8</sup> Particularly, housing may be considered as a composite commodity with characteristics h) including _location_ ( h ); _structural attributes_ of the dwelling h) like detached home or apartment, type of construction, age of the building, dimensions and number of rooms, etc.; and (XX _neighborhood characteristics_ LL h) such as quality of school, accessibility to public transport, proximity of streets, (SS crime rates, poverty rate, traffic congestion, etc. (Freeman, 1993).<sup>9</sup> In sum, the rent of the dwelling _h_ (NN

> 7 For measuring welfare, consumption which is the destruction of goods and services by use is a more useful measure than expenditures (purchases). However, for more perishable goods it is safe to assume that consumption and purchases are much tied (Deaton and Grosh, 2000).

> 8 Residential property value studies dominate the applied literature.

> 9 For a review of the characteristics used in hedonic models in 120 studies, see Sirmans et. al. (2005).

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