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Deconstructing Life-cycle Consumption with Home Production

  • Fang Yang

    (State University of New York at Albany)

  • Wenli Li

    (Federal Reserve Bank of Philadelphia)

We incorporate home production in a dynamic stochastic general equilibrium model of household consumption and saving with illiquid housing and endogenous collateralized borrowing constraint. We show that such a model is capable of explaining life-cycle patterns of households' time use and their consumption of different categories. Specifically, households' market hours increase initially as households age, then decline sharply. By contrast, households' home hours are much more stable and start to increase only later in life. Households' consumption of market good, home good, and housing services all exhibit hump shape over the life cycle, with market good having the most pronounced hump, followed by home good, and then housing services. A plausibly parameterized version of our model predicts that the interaction of labor efficiency profile and the availability of pension fund explain households' time use over the life cycle. The resulting income profile as well as endogenous borrowing constraints account for the initial humps in all three consumption goods. The consumption profiles in second half of the life cycle are mostly driven by the complementarity of home hours, home good, and housing in home production.

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Paper provided by Society for Economic Dynamics in its series 2009 Meeting Papers with number 670.

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Date of creation: 2009
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Handle: RePEc:red:sed009:670
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  1. Mariacristina Nardi, 2004. "Wealth Inequality and Intergenerational Links," Review of Economic Studies, Wiley Blackwell, vol. 71, pages 743-768, 07.
  2. Mariacristina De Nardi & Eric French & John Bailey Jones, 2006. "Differential Mortality, Uncertain Medical Expenses, and the Saving of Elderly Singles," 2006 Meeting Papers 46, Society for Economic Dynamics.
  3. Smith, Lawrence B & Rosen, Kenneth T & Fallis, George, 1988. "Recent Developments in Economic Models of Housing Markets," Journal of Economic Literature, American Economic Association, vol. 26(1), pages 29-64, March.
  4. Rupert, Peter & Rogerson, Richard & Wright, Randall, 2000. "Homework in labor economics: Household production and intertemporal substitution," Journal of Monetary Economics, Elsevier, vol. 46(3), pages 557-579, December.
  5. James Bullard & James Feigenbaum, 2006. "A leisurely reading of the life-cycle consumption data," Working Papers 2003-017, Federal Reserve Bank of St. Louis.
  6. Gervais, Martin, 2002. "Housing taxation and capital accumulation," Journal of Monetary Economics, Elsevier, vol. 49(7), pages 1461-1489, October.
  7. Jess Benhabib & Richard Rogerson & Randall Wright, 1991. "Homework in macroeconomics: household production and aggregate fluctuations," Staff Report 135, Federal Reserve Bank of Minneapolis.
  8. Mark Aguiar & Erik Hurst, 2008. "Deconstructing Lifecycle Expenditure," Working Papers wp173, University of Michigan, Michigan Retirement Research Center.
  9. Joseph G. Altonji & Ernesto Villanueva, 2003. "The Marginal Propensity to Spend on Adult Children," Working Papers 90, Barcelona Graduate School of Economics.
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