Home Production as a Substitute to Market Consumption? Estimating the Elasticity Using Houseprice Shocks from the Great Recession

Abstract

The theory of home production suggests that people will substitute away from market consumption as the opportunity cost of time drops. This makes people able to smooth consumption in response to shocks in income. Prior studies have investigated the effect of a drop in the cost of time on home production by analyzing shocks of retirement, unemployment and disability. Such shocks both decrease the households monetary budget and increase the time budget. Hence, home production responses are the cumulative effect of decreased market consumption and increased non-market time available. The current paper contributes to the literature by estimating the intratemporal elasticity between home production and market consumption. Wealth shocks in houseprices induced by the Great Recession are used to infer the extent to which households adjusted home production in response to decreasing market consumption possibilities. By using a panel data set with detailed information on both consumption spending and time use, we find that a 10% decrease in substitutable consumption spending increases home production activities by about 6.5%. Although the scope in substitutability is rather limited, there are non-negligible possibilities to substitute away from market consumption to home production. This is in contrast with the high substitutability assumed in existing theoretical models of home production.