Home production as a substitute to market consumption ... Been.pdf · Home production as a...
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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
IntroductionData & Definitions
Theoretical frameworkEmpirical model
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.
Jim Been, Susann Rohwedder, Michael Hurd Home production as a substitute to market consumption
IntroductionData & Definitions
Theoretical frameworkEmpirical model
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.
Jim Been, Susann Rohwedder, Michael Hurd Home production as a substitute to market consumption
IntroductionData & Definitions
Theoretical frameworkEmpirical model
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)
Jim Been, Susann Rohwedder, Michael Hurd Home production as a substitute to market consumption
IntroductionData & Definitions
Theoretical frameworkEmpirical model
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).
Jim Been, Susann Rohwedder, Michael Hurd Home production as a substitute to market consumption
IntroductionData & Definitions
Theoretical frameworkEmpirical model
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.
Jim Been, Susann Rohwedder, Michael Hurd Home production as a substitute to market consumption
IntroductionData & Definitions
Theoretical frameworkEmpirical model
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).
Jim Been, Susann Rohwedder, Michael Hurd Home production as a substitute to market consumption
IntroductionData & Definitions
Theoretical frameworkEmpirical model
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).
Jim Been, Susann Rohwedder, Michael Hurd Home production as a substitute to market consumption
IntroductionData & Definitions
Theoretical frameworkEmpirical model
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.
Jim Been, Susann Rohwedder, Michael Hurd Home production as a substitute to market consumption
IntroductionData & Definitions
Theoretical frameworkEmpirical model
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)
Jim Been, Susann Rohwedder, Michael Hurd Home production as a substitute to market consumption
IntroductionData & Definitions
Theoretical frameworkEmpirical model
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
Jim Been, Susann Rohwedder, Michael Hurd Home production as a substitute to market consumption
IntroductionData & Definitions
Theoretical frameworkEmpirical model
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
Jim Been, Susann Rohwedder, Michael Hurd Home production as a substitute to market consumption
IntroductionData & Definitions
Theoretical frameworkEmpirical model
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
Jim Been, Susann Rohwedder, Michael Hurd Home production as a substitute to market consumption
IntroductionData & Definitions
Theoretical frameworkEmpirical model
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)
Jim Been, Susann Rohwedder, Michael Hurd Home production as a substitute to market consumption
IntroductionData & Definitions
Theoretical frameworkEmpirical model
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)
Jim Been, Susann Rohwedder, Michael Hurd Home production as a substitute to market consumption
IntroductionData & Definitions
Theoretical frameworkEmpirical model
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.
Jim Been, Susann Rohwedder, Michael Hurd Home production as a substitute to market consumption
IntroductionData & Definitions
Theoretical frameworkEmpirical model
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
Jim Been, Susann Rohwedder, Michael Hurd Home production as a substitute to market consumption
IntroductionData & Definitions
Theoretical frameworkEmpirical model
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).
Jim Been, Susann Rohwedder, Michael Hurd Home production as a substitute to market consumption
IntroductionData & Definitions
Theoretical frameworkEmpirical model
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
Jim Been, Susann Rohwedder, Michael Hurd Home production as a substitute to market consumption
IntroductionData & Definitions
Theoretical frameworkEmpirical model
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).
Jim Been, Susann Rohwedder, Michael Hurd Home production as a substitute to market consumption
IntroductionData & Definitions
Theoretical frameworkEmpirical model
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
Jim Been, Susann Rohwedder, Michael Hurd Home production as a substitute to market consumption
IntroductionData & Definitions
Theoretical frameworkEmpirical model
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.
Jim Been, Susann Rohwedder, Michael Hurd Home production as a substitute to market consumption
IntroductionData & Definitions
Theoretical frameworkEmpirical model
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
Jim Been, Susann Rohwedder, Michael Hurd Home production as a substitute to market consumption
IntroductionData & Definitions
Theoretical frameworkEmpirical model
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.
Jim Been, Susann Rohwedder, Michael Hurd Home production as a substitute to market consumption
IntroductionData & Definitions
Theoretical frameworkEmpirical model
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.
Jim Been, Susann Rohwedder, Michael Hurd Home production as a substitute to market consumption