Does Home Production Replace Consumption Spending?

Evidence from Shocks in Housing Wealth in the Great Recession

Published in: The Review of Economics and Statistics (2018). doi: 10.1162/rest_a_00794

by Jim Been, Susann Rohwedder, Michael D. Hurd

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Becker's theory of home production suggests substitutability between consumption spending and home production. Using panel data with detailed information on spending and time use, we analyze households' ability to replace consumption spending by home produced counterparts. Keeping wages fixed and changing lifetime resources by the shock to housing wealth during the Great Recession we estimate an elasticity of substitution that is consistent with a Life-Cycle Becker model. However, we estimate that only about 11% of total spending is replaceable by home production, which, in contrast to prior literature, makes it unlikely that home production fully mitigates the consequences of wealth shocks to well-being.

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