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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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