Home production as a substitute to market consumption ... Been.pdf · Home production as a substitute to market consumption? Estimating the elasticity using ... Jim Been1, Susann

IntroductionData & Definitions

Theoretical frameworkEmpirical model

Results

Home production as a substitute to marketconsumption? Estimating the elasticity usinghouseprice shocks from the Great Recession

Jim Been1, Susann Rohwedder2, Michael Hurd3

1Department of Economics, Leiden University and Netspar2RAND Corporation, Santa Monica, CA, USA, MEA and Netspar

3RAND Corporation, Santa Monica, CA, USA, NBER, MEA and Netspar

May 19-21, 2016, QSPS, Utah State University

Jim Been, Susann Rohwedder, Michael Hurd Home production as a substitute to market consumption



Results

Motivation

Analyses of well-being have relied on measures of income andspending.

I ‘Time’ can be used to increase consumption beyond marketspending (Aguiar & Hurst 2005).

I ‘Time’ can be a considerable endowment in low-incomehouseholds.

I Becker’s 1965 theory of the allocation of time.




Results

A theory of the allocation of time (Becker 1965)

I Consumption ‘produced’ by two inputsI Market expenditures.I Time.

I Money-intensive versus Time-intensive goods.

I Composition of consumption bundle depends on relative priceof time.

I Shift in composition when the price of time changes.




Results

Augmenting the standard classical model (Gronau, 1977)

maxcmt ,hmt ,hntu(cm, cn(hn), l) (1)

with home production function

cn(hn) = g(hn) (2)

subject to a time- and monetary budget

H = hm + hn + l (3)

cm = w · (H − l − hn) + b (4)




Results

Shocks and Home Production

Home production can smooth consumption in response to shocksin income (Hicks 2015):

I Home production and retirement (e.g. Aguiar & Hurst 2005).

I Home production and unemployed households (e.g. Guler &Taskin 2013).

I Home production and health (e.g. Halliday & Podor 2012).

I Home production and wealth (e.g. Kuehn 2015).




Results

Identification strategies

I Transitory shocks in income.I Monetary- and Time-budget: substitution or time-endowment?

I Disputable instruments: lagged consumption (Rupert et al.1995).

I Very specific subsample: EITC and single women (Gelber &Mitchell 2009).

I Permanent shocks in income: permanent income (Hicks2015).

I Identification from cross-sectional differences between poorerand richer persons.




Results

Main contribution

Intratemporal elasticity from within-person variation.

I Causal identification:I Wealth-shocks only influence monetary-budget.I Large exogenous shock: houseprices in the Great Recession.

I Consumption (Angrisani et al. 2015).I Home production (Kuehn 2015).




Results

Minor contribution

Panel data with detailed consumption spending and time-useinformation of persons in US households (HRS/CAMS).

I Consumption: Retirement-Consumption ”Puzzle” literature.

I Time-use: Burda & Hamermesh (2010); Aguiar et al. (2013).

I Both, but imperfect: Ahn et al. (2008) (cross-section); Velarde &

Herrmann (2014) (food).

I Both: Colella & Van Soest (2013) (NL); Hicks (2015) (MEX).




Results

HRS/CAMS

Health and Retirement SurveyI Representative 50+ population of the US.

I Longitudinal: 12 waves.

I 20,000 persons every two years (one wave).

I Detailed information on demographics, economic status, etc.

Consumption and Activities Mail SurveyI Supplementary study to HRS.

I Survey to subset of HRS respondents.

I Longitudinal: 4 waves (2005, 2007, 2009, 2011).

I 37 time-use categories, 39 spending categories.

I Information on both spouses within a household.




Results

Definition of home production

Following Aguiar et al. (2013):I House cleaning

I Washing, ironing or mending clothes (Laundry)

I Yard work or gardening (Gardening)

I Shopping or running errands (Shopping)

I Preparing meals and cleaning up afterwards (Cooking)

I Taking care of finances or investments, such as banking, paying bills,balancing the checkbook, doing taxes, etc. (Financial Management)

I Doing home improvements, including painting, redecorating, or makinghome repairs (Home maintenance)

I Working on, maintaining, or cleaning car(s) and vehicle(s) (Vehiclemaintenance)




Results

What can home production substitute?

”Home Production Substitutable Consumption”:

I House cleaning ⇐⇒ Housekeeping services

I Laundry ⇐⇒ Housekeeping services, Washing/Drying machine

I Gardening ⇐⇒ Gardening services

I Shopping ⇐⇒ n.a.

I Cooking ⇐⇒ Dining out, Dishwasher

I Financial Management ⇐⇒ n.a.

I Home maintenance ⇐⇒ Homerepair services

I Vehicle maintenance ⇐⇒ Vehicle maintenance services




Results

Consumption spending across Time ($/y)

Wave 2005 Wave 2007 Wave 2009 Wave 2011Mean Mean Mean Mean

Dining out 1,795 1,761 1,472 1,683Housekeeping services 432 390 291 296Gardening services 486 429 348 363Homerepair services 1,403 1,412 1,176 1,059Vehicle maintenance 632 558 556 545Dishwasher 21 82 18 18Washing/Drying machine 71 82 69 45

Substitutable consumption 4,841 4,656 3,930 4,009Substitutable consumption excl. durables 4,749 4,549 3,843 3,946Substitutable consumption incl. suppl. mat. 6,540 6,266 5,320 5,402

Total consumption 40,120 38,856 36,122 35,348




Results

Home Production across Time (h/w)

Wave 2005 Wave 2007 Wave 2009 Wave 2011Mean Mean Mean Mean

House cleaning 4.5 5.2 5.0 4.8Laundry 2.7 2.6 2.8 2.6Gardening 2.7 3.0 2.9 3.0Shopping 4.1 3.9 4.0 4.0Cooking 7.0 7.0 6.8 7.1Financial management 0.9 1.0 0.8 0.9Home maintenance 1.0 0.9 0.7 0.7Vehicle maintenance 0.3 0.4 0.4 0.4

Home production 23.1 23.9 23.4 23.3




Results

Life-Cycle Model with Home Production and WealthShocks

Uτ = maxcmt ,hmt ,hnt Eτ

[T∑

t=τ

(1 + δ)τ−tu(cmt , cnt(hnt), lt)ψ(vt)

](5)

with

cnt(hnt) = gt(hnt) (6)

cmt = {csmt , cnsmt} (7)

subject to

hnt = H − hmt − lt (8)

At+1 = (1 + r)(Et [At ] + (wt · (H − lt − hnt)) + bt − cmt) (9)

Et [At ] = At + ξt (10)




Results

Theoretical predictions

ucmt (cmt , cnt(hnt), lt)ψ(vt) =

(1 + r

1 + δ

)Et[ucmt+1 (cmt+1, cnt+1(hnt+1), lt+1)ψ(vt+1)

](11)

uhmt (cmt , cnt(hnt), lt)ψ(vt) = −wt

(1 + r

1 + δ

)Et[uhmt+1

(cmt+1, cnt+1(hnt+1), lt+1)ψ(vt+1)]

(12)

uhnt (cmt , cnt(hnt), lt)ψ(vt) = wt

(1 + r

1 + δ

)Et[uhnt+1

(cmt+1, cnt+1(hnt+1), lt+1)ψ(vt+1)]

(13)




Results

Empirical model

Estimating the elasticity:

∆ln(hint+1) = ∆Xit+1βn1 + ∆ln(c simt+1)βn2 + εint+1 (14)

where βn2 =∆hnt+1

∆csmt+1, using

∆ln(c simt+1) = ∆Xit+1βc1 + DGR∆ln(Wit)βc2 + εict+1 (15)

Keeping (wt · (H − lt − hnt)) + bt constant.




Results

Identification: Houseprice changes

−20

−10

010

2030

Mea

n re

port

ed h

ouse

pric

e ch

ange

(1,

000’

s of

U.S

. dol

lars

)

2003 2005 2007 2009 2011Year




Results

Instrument: Validity & Relevance

Validity:

hnt = H − hmt − lt (16)

At+1 = (1 + r)(Et [At ] + (wt · (H − lt − hnt)) + bt − cmt) (17)

Relevance:

I General: Case et al. (2005; 2013), Carroll et al. (2011).

I Older households: Campbell & Cocco (2007).

I Great Recession: Angrisani et al. (2015), Christelis et al. (2015).




Results

Estimation results

Second-stage ∆ln(hint+1)Coeff. S.E.

Elasticity∆ln(c simt+1) -0.65* 0.37

First-stage ∆ln(c simt+1)Coeff. S.E.

InstrumentDGR∆ln(Wit) 0.14** 0.06

F-statistic 5.6

Observations (N × T ) 2,500




Results

Interpretation

I βn2 = ∆ln(hint+1)∆ln(cimt+1) = −0.65.

I Less than perfect substitute.

I Bigger than elasticity found by Hicks (2015): -0.03(endogeneity/food).

I Average effect: drop in consumption of 40 dollars (p/y)increases home production by about 7.6 hours (p/y): shadowwage $5.30.

I Reasonably lower than minimum wage in retirement (Ghez &Becker 1975).




Results

Robustness to different definitions

Definition First-stage Second-stage

βc2 σ2βc2

βn2 σ2βn2

Obs.

ln(csimt+1) 0.14** 0.06 -0.65* 0.37 2,500

ln(csimt+1) excl. durables 0.12** 0.06 -0.71* 0.44 2,500

ln(csimt+1) incl. suppl. material 0.14** 0.06 -0.61** 0.31 2,504

ln(csimt+1) dining out only 0.30*** 0.11 -0.29* 0.17 2,489

ln(csimt+1) excl. homerepair services 0.12** 0.06 -0.74* 0.45 2,491

ln(csimt+1) excl. homerepair/gardening services 0.12** 0.06 -0.74* 0.45 2,490




Results

Heterogeneous elasticities

Elasticity primarily determined by:

I Drop in houseprice value.

I Relatively low houseprice value (absolute).

I Mortgage-free.

I Medium household income.

I Relatively high substitutable spending.

I Relatively low home production level.

Not by:

I Financial wealth.

I Indebtedness.




Results

Lower bound

hn csmMean S.E. Mean S.E.

Non-retired 19.8 0.26 5,177.5 103.4Retired 23.2 0.23 3,747.8 64.0∆ 3.4*** 0.35 -1,429.7*** 115.3Non-retired men 16.1 0.29 6,013.6 175.9Retired men 19.1 0.23 3,992.8 96.3∆ 3.0*** 0.50 -2,020.7*** 194.9Non-retired women 22.6 0.39 4,540.6 122.1Retired women 25.2 0.28 3,624.5 83.0∆ 2.6*** 0.47 -916.0*** 143.1Non-retired < 65 19.4 0.27 5,247.1 133.6Retired < 65 23.6 0.47 3,766.0 126.9∆ 4.2*** 0.51 -1,481.1*** 199.2Non-retired 65+ 20.6 0.55 5,029.1 153.8Retired 65+ 23.0 0.27 3,740.8 73.9∆ 2.4*** 0.58 -1,288.3*** 158.6




Results

Conclusion

I ’Small’ substitution effects ( ∆ln(hint+1)∆ln(csimt+1) = −0.65).

I Small scope for substituting csmt (≈ 12%).

I High substitutability assumed in theoretical (macro) models(Campbell & Ludvigson 2001).

I Estimates are credible lower bound.




Results

Importance for pensions

I Income and spending drop at retirement(Retirement-Consumption Puzzle literature).

I Drop in well-being likely to be smaller:I Substitute csmt for cnt .I Considerably more non-work time available (hmt = 0).

I Need for Pension Adequacy measures that go beyond incomeand spending.


Documents

Home production as a substitute to market consumption ... Been.pdf · Home production as a substitute to market consumption? Estimating the elasticity using ... Jim Been1, Susann