Home production and Social Security reform

Michael Dotsey, Wenli Li and Fang Yang

European Economic Review, 2015, vol. 73, issue C, 131-150

Abstract: This paper incorporates home production into a dynamic general equilibrium model of overlapping generations with endogenous retirement to study Social Security reforms. Specifically, home production takes housing, home input, and home hours as inputs and produces a good that is substitutable with market good. As such, the model differentiates both consumption goods and labor effort according to their respective roles in home production and market activities. Using a calibrated model, we conduct a policy experiment where we eliminate the current pay-as-you-go Social Security system. We find that the experiment has important implications for labor supply as well as consumption decisions and that these decisions are influenced by the presence of the home production technology. More importantly, comparing our economy to a one-good economy without home production, the welfare gains of eliminating Social Security are magnified significantly especially in the long run. The reasons are twofold and related to the general aspects of home production. First, home production implies a more elastic labor supply rendering the payroll labor tax more distortionary. Second, home production introduces insurance possibilities that are not present when only market-produced goods are available and, thus, reduces the need for government redistributive policies.

Keywords: Home production; Housing; Social Security reform; Labor supply (search for similar items in EconPapers)
JEL-codes: E21 E62 H55 (search for similar items in EconPapers)
Date: 2015
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (14)

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Related works:
Working Paper: Home Production and Social Security Reform (2014)
Working Paper: Home production and Social Security reform (2012)
Working Paper: Home Production and Social Security Reform (2012)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:eecrev:v:73:y:2015:i:c:p:131-150

DOI: 10.1016/j.euroecorev.2014.11.006

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